FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

accounting and, based on the audit evidence obtained, whether a material uncertainty 2018 2017 Bangladesh Branches exists related to events or conditions that may cast significant doubt on the Bank’s Notes BDT BDT ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the Money at call on short notice 7 - 1,310,000,000 Independent Auditor's Report to the Management of financial statements or, if such disclosures are inadequate, to modify our opinion. Our The Hongkong and Shanghai Banking Corporation Limited conclusions are based on the audit evidence obtained up to the date of our auditor’s Investments 8 Bangladesh Branches report. However, future events or conditions may cause the Bank to cease to continue Government securities 28,492,063,133 31,404,926,775 as a going concern. Others 6,000,000 6,000,000 28,498,063,133 31,410,926,775 Report on the Audit of the Financial Statements  Evaluate the overall presentation, structure and content of the financial statements, Loans and advances 9 including the disclosures, and whether the financial statements represent the underlying Loans, cash credits, overdrafts etc. 82,051,052,546 67,907,720,280 Opinion transactions and events in a manner that achieves fair presentation. Bills purchased and discounted 1,194,585,309 333,554,131 We have audited the financial statements of The Hongkong and Shanghai Banking 83,245,637,855 68,241,274,411 Corporation Limited (HSBC), Bangladesh Branches (the “Bank”) which comprise Report on Other Legal and Regulatory Requirements the balance sheet as at 31 December 2018 and profit and loss account, cash flow In accordance with the Companies Act, 1994, the Bank Company Act, 1991 and the Fixed assets including premises, furniture and fixtures 10 292,843,266 333,843,489 statement and statement of changes in equity for the year then ended, and a summary rules and regulations issued by Bangladesh Bank, we also report that: of significant accounting policies, other explanatory notes and annexures thereto. Other assets 11 5,187,906,865 9,042,736,202 (i) we have obtained all the information and explanations which to the best of our In our opinion, the accompanying financial statements of the Bank give a true and fair knowledge and belief were necessary for the purpose of our audit and made due Non - banking assets - - view of the financial position of the Bank as at 31 December 2018, and of its financial verification thereof; performance and its cash flows for the year then ended in accordance with International Total assets 167,781,627,571 140,808,972,270 Financial Reporting Standards (IFRSs) as explained in note 3. (ii) to the extent noted during the course of our audit work performed on the basis stated under the Auditor’s Responsibility section in forming the above opinion on the financial statements and considering the reports of the Management to Bangladesh Bank on Basis for Opinion LIABILITIES AND CAPITAL We conducted our audit in accordance with International Standards on Auditing anti-fraud internal controls and instances of fraud and forgeries as stated under the (ISAs). Our responsibilities under those standards are further described in the Auditors’ Management’s Responsibility for the financial statements and internal control: Liabilities Responsibilities for the Audit of the Financial Statements section of our report. We a) internal audit, internal control and risk management arrangements of the Bank as are independent of the Bank in accordance with the International Ethics Standards disclosed in the financial statements appeared to be materially adequate; Borrowings from other banks, financial Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code) and institutions and agents 12 9,259,657,680 6,252,156,882 requirements of Bangladesh Bank, and we have fulfilled our other ethical responsibilities b) nothing has come to our attention regarding material instances of forgery or in accordance with the IESBA Code and the Institute of Chartered Accountants of irregularity or administrative error and exception or anything detrimental committed Deposits and other accounts 13 Bangladesh (ICAB) Bye-laws. We believe that the audit evidence we have obtained is by employees of the Bank; sucient and appropriate to provide a basis for our opinion. (iii) in our opinion, proper books of account as required by law have been kept by the Current accounts and other accounts 39,874,092,710 40,933,496,924 Bank so far as it appeared from our examination of those books; Bills payable 2,455,678,768 1,983,907,500 Responsibilities of Management and Those Charged with Governance Saving deposits 19,871,514,757 12,396,346,924 for the Financial Statements and Internal Controls (iv) the records and statements submitted by the branches have been properly Term deposits 55,619,240,613 42,515,902,125 maintained and consolidated in the financial statements; 117,820,526,848 97,829,653,473 Management is responsible for the preparation and fair presentation of the financial (v) the balance sheet and profit and loss account together with the annexed notes dealt statements of the Bank in accordance with IFRSs as explained in note 3, and for such Other liabilities 14 9,994,651,202 7,445,495,927 internal control as management determines is necessary to enable the preparation with by the report are in agreement with the books of account and returns; Total liabilities 137,074,835,730 111,527,306,282 of financial statements that are free from material misstatement, whether due to fraud (vi) the expenditures incurred were for the purpose of the Bank’s business for the year; or error. The Bank Company Act, 1991 and the Bangladesh Bank Regulations require the Capital/shareholders' equity Management to ensure eective internal audit, internal control and risk management (vii) the financial statements have been drawn up in conformity with prevailing rules, Fund deposited with Bangladesh Bank 15 3,099,690,272 3,072,581,767 functions of the Bank. The Management is also required to make a self-assessment regulations and accounting standards as well as related guidance issued by Bangladesh Other reserves 16 (51,848,810) (126,773,148) on the eectiveness of anti-fraud internal controls and report to Bangladesh Bank on Bank; Profit and loss account 17 27,658,950,379 26,335,857,369 instances of fraud and forgeries. (viii) adequate provisions have been made for loans and advances and other assets Total shareholders' equity 30,706,791,841 29,281,665,988 Total liabilities and shareholders' equity 167,781,627,571 140,808,972,270 In preparing the financial statements, management is responsible for assessing the which are in our opinion, doubtful of recovery; Bank’s ability to continue as a going concern, disclosing, as applicable, matters related (ix) the information and explanations required by us have been received and found OFF BALANCE SHEET ITEMS to going concern and using the going concern basis of accounting unless management satisfactory; either intends to liquidate the Bank or to cease operations, or has no realistic alternative Contingent liabilities 18 (x) we have reviewed over 80% of the risk weighted assets of the Bank and spent over but to do so. Those charged with governance are responsible for overseeing the Bank’s Acceptances and endorsements 87,675,262,477 71,300,858,731 financial reporting process. 2,280 person hours; and Letters of guarantee 56,719,420,056 30,143,609,594 (xi) Capital to Risk-weighted Asset Ratio (CRAR) as required by Bangladesh Bank has Irrevocable letters of credit 65,888,926,453 74,176,407,128 Auditor’s Responsibilities for the Audit of the Financial Statements been maintained adequately during the year. Foreign exchange contracts - Spot and Forward 5,094,357,828 3,357,031,546 Our objectives are to obtain reasonable assurance about whether the financial Total 215,377,966,814 178,977,906,999 statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is Other Commitments a high level of assurance, but is not a guarantee that an audit conducted in accordance Hoda Vasi Chowdhury & Co with ISAs will always detect a material misstatement when it exists. Misstatements can Documentary credits and short term trade-related transactions - - Dhaka, 18 February 2019 Chartered Accountants arise from fraud or error and are considered material if, individually or in the aggregate, Forward assets purchased and forward deposits placed - - they could reasonably be expected to influence the economic decisions of users taken Un-drawn note issuance and revolving undertaking facilities - - on the basis of these financial statements. Balance Sheet Un-drawn formal standby facilities, credit lines and other commitments - - Total - - As part of an audit in accordance with ISAs, we exercise professional judgement and as at 31 December 2018 Total o balance sheet items 215,377,966,814 178,977,906,999 maintain professional skepticism throughout the audit. We also: 2018 2017 The annexed notes 1 to 36 form an integral part of these financial statements.  Identify and assess the risks of material misstatement of the financial statements, PROPERTY AND ASSETS Notes BDT BDT whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sucient and appropriate to provide Cash 5 a basis for our opinion. The risk of not detecting a material misstatement resulting In hand (including foreign currencies) 1,591,297,506 1,456,916,855 Francois de Maricourt Farhanul Gani Choudhury from fraud is higher than for one resulting from error, as fraud may involve collusion, With Bangladesh Bank and its agent bank(s) Chief Executive Ocer, Bangladesh Chief Financial Ocer, Bangladesh forgery, intentional omissions, misrepresentations, or the override of internal control. (including foreign currencies) 44,161,418,654 26,519,713,751  Obtain an understanding of internal control relevant to the audit in order to design 45,752,716,160 27,976,630,606 As per our report of same date audit procedures that are appropriate in the circumstances. Balance with other banks and financial institutions 6

 Evaluate the appropriateness of accounting policies used and the reasonableness In Bangladesh 154,562,977 134,209,605 of accounting estimates and related disclosures made by management. Outside Bangladesh 4,649,897,315 2,359,351,182 Hoda Vasi Chowdhury & Co  Conclude on the appropriateness of management’s use of the going concern basis of 4,804,460,292 2,493,560,787 Dhaka, 18 February 2019 Chartered Accountants FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 Bangladesh Branches

2018 2017 charged in the profit and loss account. Interest on HFT securities including amortisation Profit and Loss Account Notes BDT BDT of discount are recognised in the profit and loss account. HTM securities which have for the year ended 31 December 2018 not matured as at the balance sheet date are amortised at year end and gains or losses C Cash flow from financing activities on amortisation are recognised in other reserve as part of equity. 2018 2017 iii) Repo and reverse repo transactions Notes BDT BDT Cash remitted to head oce 17 (1,752,956,468) - Net cash used in financing activities (1,752,956,468) - IFRS: As per IFRS 9 when an entity sells a financial asset and simultaneously enters Interest income 19 7,076,229,753 4,985,860,593 into an agreement to repurchase the asset (or a similar asset) at a fixed price on a future Interest paid on deposits and borrowings 20 (2,242,405,469) (1,479,579,958) D Net increase in cash and date (repo), the arrangement is treated as a loan and the underlying asset continues to Net interest income 4,833,824,284 3,506,280,635 cash equivalents (A+B+C) 19,598,200,631 2,727,670,596 be recognised at amortised cost in the entity’s financial statements. The dierence Income from investments 21 1,136,268,380 1,487,194,008 between selling price and repurchase price will be treated as interest expense. The Commission, exchange and brokerage 22 3,462,492,646 3,727,368,615 E Gain/(Loss) on revaluation of foreign currency same rule applies to the opposite side of the transaction (reverse repo). deposited with Bangladesh Bank as capital 15 27,108,505 137,946,818 Other operating income 23 35,324,256 27,923,692 Bangladesh Bank: As per Department of O-Site Supervision (DOS) Circular letter no. Total operating income 9,467,909,566 8,748,766,950 06 dated 15 July 2010 and subsequent clarification in DOS circular no. 02 dated 23 F Net increase in cash and cash equivalents (D+E) 19,625,309,136 2,865,617,414 January 2013, when a bank sells a financial asset and simultaneously enters into an Salaries and allowances 24 2,588,251,877 2,384,218,195 agreement to repurchase the asset (or a similar asset) at a fixed price on a future date Rent, taxes, insurance, electricity etc. 625,660,862 524,500,931 G Opening cash and cash equivalents 37,925,507,436 35,059,890,022 (repo or stock lending), the arrangement is accounted for as a normal sales transaction Legal and professional expenses 25 31,614,344 126,605,349 and the financial asset is derecognised in the seller’s book and recognised in the Postage, stamp, telecommunication etc. 92,230,721 49,216,580 H Closing cash and cash equivalents (F+G) 32 57,550,816,572 37,925,507,436 buyer’s book. Auditors' fee 26 1,200,000 1,200,000 Stationery, printings and advertisements etc. 132,974,922 78,323,800 iv) Provision on loans and advances/investments Notes to the Financial Statements Chief Executive Ocer's salary and allowances 67,714,020 51,151,939 IFRS: As per IFRS 9 an entity shall recognise an impairment allowance on loans and Depreciation, impairment and repair of Bank's assets 27 372,300,872 435,571,022 as at and for the year ended 31 December 2018 advances based on expected credit losses. At each reporting date, an entity shall Other operating expenses 29 561,924,056 445,038,127 measure the impairment allowance for loans and advances at an amount equal to the 4,473,871,674 4,095,825,943 1 Background lifetime expected credit losses if the credit risk on these loans and advances has Expense allocation to Oshore Banking Unit (736,107,046) (1,158,133,221) The Hongkong and Shanghai Banking Corporation Limited ("HSBC"), Bangladesh increased significantly since initial recognition whether assessed on an individual or Total operating expenses 3,737,764,628 2,937,692,722 Branches ("the Bank") commenced its banking operations in Bangladesh on 3 collective basis considering all reasonable information, including that which is Profit before provision 5,730,144,938 5,811,074,228 December 1996 after obtaining its banking licence from Bangladesh Bank on 17 April forward-looking. For those loans and advances for which the credit risk has not

1996. HSBC is incorporated in Hong Kong and its ultimate holding company HSBC increased significantly since initial recognition, at each reporting date, an entity shall Specific provision for classified loans and advances 14.3 105,939,150 56,768,944 Holdings plc ("the Group") is incorporated in England. measure the impairment allowance at an amount equal to 12 month expected credit General provision for unclassified loans and advances losses that may result from default events on such loans and advances that are possible and o balance sheet exposures 14.3 326,133,407 228,587,229 HSBC also operates an Oshore Banking Unit (OBU) after obtaining its licence from within 12 months after reporting date. Other provision - (12,472,100) Bangladesh Bank on 9 July 1998. Bangladesh Bank: As per BRPD circular No.15 (27 September 2017), BRPD circular Total provision 432,072,557 272,884,073 No.16 (18 November 2014), BRPD circular No.14 (23 September 2012), BRPD circular Profit before tax 5,298,072,381 5,538,190,155 2 Principal activities No. 19 (27 December 2012), BRPD circular No. 05 (29 May 2013) and BRPD circular HSBC oers a comprehensive range of financial services in Bangladesh including No.1 (20 February 2018) a general provision at 0.25% to 5% under dierent categories commercial and institutional banking, retail banking, global markets, global trade and Tax of unclassified loans (good/standard loans) has to be maintained regardless of receivable finance, global liquidity and cash management and custody and clearing. Current year 2,375,688,268 2,233,225,723 objective evidence of impairment. Also specific provision for sub-standard loans, Prior year (153,439,571) (16,355,513) 2.1 Commercial Banking: Commercial Banking provides a wide range of financial doubtful loans and bad losses has to be provided at 5%, 20%, 50% and 100% Deferred tax (225,794) (18,644,835) services and products having international connectivity to meet the need of both respectively for loans and advances depending on time past due. Again as per BRPD 30 2,222,022,903 2,198,225,375 corporate and commercial customers. Services provided include working capital, term circular no. 10 dated 18 September 2007 and BRPD circular no. 14 dated 23 September Profit after tax for the year 17 3,076,049,478 3,339,964,780 loans, payment services and international trade facilitation, among other services, as 2012, a general provision at 1% is required to be provided for all o-balance sheet well as expertise in mergers and acquisitions, and access to financial markets. This exposures. Such provision policies are not specifically in line with those prescribed by The annexed notes 1 to 36 form an integral part of these financial statements. allows the Bank to provide continuous support to companies as they grow both IFRS 9. domestically and internationally and ensures a clear focus on internationally aspirant customers. The Bank has an OBU license and therefore also provides foreign currency v) Recognition of interest in suspense financing to qualifying customers. IFRS: Loans and advances to customers are generally classified at amortised cost as Francois de Maricourt Farhanul Gani Choudhury 2.2 Retail Banking: There are seven branches and thirty three ATMs in Dhaka, per IFRS 9 and interest income is recognised by using the eective interest rate method Chief Executive Ocer, Bangladesh Chief Financial Ocer, Bangladesh Chattogram and Export Processing Zones (EPZ). HSBC oers a wide range of personal to the gross carrying amount over the term of the loan. Once a loan subsequntly banking and other related financial services. Retail banking mainly focus to cater high become credit-impaired, the entity shall apply the eective interest rate to the As per our report of same date net worth customers under ‘Select’ proposition and corporate customers under amortised cost of these loans and advances. Corporate Employee Privilege Scheme (CEPS) proposition. Bangladesh Bank: As per BRPD circular no. 14 dated 23 September 2012, once a loan As part of its financial services oered, since 2010 the Bank has provided personal is classified as impaired, interest on such loans are not allowed to be recognised as income, rather the corresponding amount needs to be credited to an interest in Hoda Vasi Chowdhury & Co internet banking ("PIB") for customers. PIB provides real time viewing, control and suspense account, which is presented as a liability in the balance sheet. Dhaka, 18 February 2019 Chartered Accountants transaction access to customer accounts and comes with a state-of-the-art security device. vi) Other comprehensive income 2.3 Global Markets: Global Markets provides financial solutions mainly in foreign IFRS: As per IAS 1 Other Comprehensive Income (OCI) is a component of financial exchange and money market products to international and local corporations, Statement of Changes in Equity statements or the elements of OCI are to be included in a single other comprehensive institutional customers including other banks, the Central Bank as well as other market for the year ended 31 December 2018 income statement. participants. Global Markets operates a long-term relationship approach to provide Fund solutions relating to the clients foreign exchange needs. Bangladesh Bank: Bangladesh Bank has issued templates for financial statements which will strictly be followed by all banks. The templates of financial statements deposited 2.4 Financial Institutions Group: Financial Institutions Group is the client sector within issued by Bangladesh Bank neither include Other Comprehensive Income nor are the with Other Profit and Total Global Banking and Markets responsible for all aspects of the Group's relationships elements of Other Comprehensive Income allowed to be included in a single other Particulars Bangladesh reserve loss account with financial institutions. Financial Institution Group manages banks and non-bank Comprehensive Income (OCI) Statement. As such the Bank does not prepare the other Bank financial institutions. (Note 15) (Note 16) (Note 17) comprehensive income statement. However, elements of OCI, if any, are shown in the BDT BDT BDT BDT 2.5 Global Trade and Receivables Finance: HSBC is the largest trade bank with 150 statement of changes in equity. years of experience. With a modern trade operation and robust technological platform, Balance at 01 January 2017 2,934,634,949 (128,146,945) 22,995,892,589 25,802,380,593 HSBC tries to ensure consistent and faster services to the customers in meeting their vii) Financial instruments – presentation and disclosure Exchange dierence 137,946,818 - - 137,946,818 working capital requirements. Using a wide global-coverage and extensive experience In several cases Bangladesh Bank guidelines categorise, recognise, measure and Net profit for the year - - 3,339,964,780 3,339,964,780 in trade, the Global Trade and Receivable Finance (GTRF) continues to capture market present financial instruments dierently from those prescribed in IFRS 9. As such full Unrealised interest on amortisation share. The Bank is perfectly placed to introduce new trade products in modernised and disclosure and presentation requirements of IFRS 7 and IAS 32 cannot be made in the of HTM Securities (net of deferred digitised methods. financial statements. tax assets/liabilities) - 50,088,898 - 50,088,898 Currently, HSBC Bangladesh operates in both the major commercial hubs (i.e. Dhaka Unrealised interest on revaluation and Chattogram) in Bangladesh and has presence in all eight Export Processing Zones viii) Financial guarantees of HFT Securities (net of deferred (EPZs) of the country through Business Development Oces (in Dhaka, Chattogram, IFRS: As per IFRS 9, financial guarantees are contracts that require the issuer to make tax assets/liabilities) - (588,599) - (588,599) Cumilla, Mongla, Adamjee, Karnaphuli, Ishwardi and Nilphamari). specified payments to reimburse the holder for a loss it incurs because a specified Actuarial gain /(loss) (net of 2.6 Global Liquidity and Cash Management: Global Liquidity and Cash Management debtors fails to make payment when due in accordance with the original or modified deferred tax assets/liabilities) - (48,126,502) - (48,126,502) (GLCM) helps clients to optimise control over cash flows with our global payables, terms of a debt instrument. Financial guarantee liabilities are recognised initially at their fair value plus transaction costs that are directly attributable to the issue of the financial Profit remitted to head oce - - - - receivables and liquidity solutions coupled with online platform. Strategic cash liabilities. The financial guarantee liability is subsequently measured at the higher of the management and enhanced visibility are vital to success and business growth by amount of loss allowance for expected credit losses as per impairment requirement Balance at 31 December 2017 3,072,581,767 (126,773,148) 26,335,857,369 29,281,665,988 making faster, smarter business decisions. GLCM is part of HSBC’s Global Commercial and the amount initially recognised less, income recognised in accordance with the Banking and Global Banking and Markets and it supports relationship managers by Exchange dierence 27,108,505 - - 27,108,505 principles of IFRS 15. Financial guarantees are included within other liabilities. providing the products and expertise that our customers need. HSBC GLCM is uniquely Net profit for the year - - 3,076,049,478 3,076,049,478 positioned to help clients make payments across borders, across currencies with Bangladesh Bank: As per BRPD 14, financial guarantees such as letter of credit and Unrealised interest on amortisation conformity to local regulations, quickly and cost eectively with dedicated in country letter of guarantee will be treated as o-balance sheet items. No liability is recognised of HTM Securities (net of and regional support. for the guarantee except the cash margin. As per BRPD Circular No.01 dated 03 deferred tax assets/liabilities) - 9,342,390 - 9,342,390 January 2018 and BRPD Circular No.14 dated 23 September 2012, the Bank is required 2.7 Custody and Clearing: HSBC delivers a comprehensive range of custody and Unrealised interest on revaluation to maintain provision at 1% against gross o-balance sheet exposures (which includes clearing services to institutional clients, underpinned by best practices, state-of-the-art of HFT Securities (net of undrawn loan commitments). technology, operational eciency and world-class services. The network uses an deferred tax assets/liabilities) - - - - advanced securities platform, which was developed in-house and provides ix) Cash and cash equivalents Actuarial gain/(loss) (net of round-the-clock online real-time access to clients’ securities portfolios. deferred tax assets/liabilities) - 65,581,948 - 65,581,948 IFRS: Cash and cash equivalent items should be reported as cash item as per IAS 7. 3 Basis of preparation Profit remitted to head oce - - (1,752,956,468) (1,752,956,468) Bangladesh Bank: Some cash and cash equivalent items such as money at call on short notice, treasury bills with maturity of more than three months and prize bond are Balance at 31 December 2018 3,099,690,272 (51,848,810) 27,658,950,379 30,706,791,841 3.1 Statement of compliance not shown as cash and cash equivalents. Money at call on short notice is shown The Financial Reporting Act 2015 (FRA) was enacted in 2015. Under the FRA, the separately in the balance sheet. Treasury bills with maturity of more than three months Financial Reporting Council (FRC) is formed and it is yet to issue financial reporting and prize bond are shown under investment in the balance sheet. Cash Flow Statement standards for public interest entities such as banks. The Bank Company Act 1991 has for the year ended 31 December 2018 been amended to require banks to prepare their financial statements under such x) Non-banking assets financial reporting standards. The FRC has been formed but yet to issue any financial reporting standards as per the provisions of the FRA and hence International Financial IFRS: No indication of Non-banking assets is found in any IFRS. 2018 2017 Reporting Standards (IFRS) as approved by the Institute of Chartered Accountants of Notes BDT BDT Bangladesh Bank: As per BRPD 14, there is a separate balance sheet item named Bangladesh (ICAB) are still applicable. Non-banking assets existed in the standard format. A Cash flow from operating activities Accordingly, the financial statements of the Bank continue to be prepared in xi) Cash flow statement accordance with International Financial Reporting Standards (IFRS) and the Interest received 7,056,749,914 4,975,044,315 requirements of the Bank Company Act 1991, the rules and regulations issued by IFRS: The cash flow statement can be prepared using either the direct method or the Interest paid (1,875,013,555) (1,473,756,263) Bangladesh Bank (BB), the Companies Act 1994. In case any requirement of the Bank indirect method. The presentation is selected to present these cash flows in a manner Dividends receipts 7,500,000 15,000,000 Company Act 1991, and provisions and circulars issued by Bangladesh Bank dier with that is most appropriate for the business or industry. The method selected is applied Commission, exchange and brokerage received 3,434,620,577 3,808,075,235 those of IFRS, the requirements of the Bank Company Act 1991, and provisions and consistently. circulars issued by Bangladesh Bank shall prevail. Material deviations from the Other income 20,959,379 24,516,280 Bangladesh Bank: As per BRPD 14, the cash flow statement is a mixture of both the requirements of IFRS are as follows: Cash paid to employees (2,580,867,535) (2,549,642,143) direct and the indirect methods. Cash paid to suppliers (1,034,574,736) (969,133,297) Cash paid for other operating expenses (473,890,353) (449,894,072) i) Investment in shares and securities xii) Balance with Bangladesh Bank: (Cash Reserve Ratio - CRR) Operating profit before changes in operating IFRS: As per requirements of IFRS 9, classification and measurement of investment in IFRS: CRR maintained with Bangladesh Bank should be treated as other asset as it is assets and liabilities 4,555,483,691 3,380,210,055 shares and securities will depend on how these are managed (the entity’s business not available for use in day to day operations as per IAS 7. model) and their contractual cash flow characteristics. Based on these factors it would (Increase)/decrease of operating assets: generally fall either under “at fair value through profit or loss account” or under “at fair Bangladesh Bank: Balance with Bangladesh Bank including CRR is treated as cash Loans and advances to customers (15,004,363,444) (6,710,298,883) value through other comprehensive income” where any change in the fair value (as and cash equivalents. Other assets 4,486,786,519 1,032,898,232 measured in accordance with IFRS 13) at the year-end is taken to profit and loss account or other comprehensive income respectively. xiii) Presentation of intangible assets Increase/(decrease) of operating liabilities: Bangladesh Bank: As per Banking Regulation and Policy Department (BRPD) circular IFRS: Intangible assets must be identified and recognised, and the disclosure must be Customers deposits 19,990,873,375 6,937,092,443 no. 14 dated 25 June 2003 investments in quoted shares and unquoted shares are given as per IAS 38. Borrowing from other banks and financial institutions 3,007,500,798 (1,966,270,715) revalued at the year end at market price and as per book value of last audited balance Bangladesh Bank: There is no regulation for intangible assets in BRPD 14. Other liabilities 2,263,887,608 1,532,865,548 sheet respectively. Provision should be made for any loss arising from diminution in 14,744,684,856 826,286,625 value of investment; otherwise investments are recognised at cost. xiv) O-balance sheet items Cash receipt from operating activities 19,300,168,547 4,206,496,680 Advance income tax paid 14.5 (2,861,011,433) (2,992,945,916) ii) Revaluation gains/losses on Government securities IFRS: As per IFRS, there is no requirement for disclosure of o-balance sheet items on Net cash receipt from operating activities 16,439,157,114 1,213,550,764 the face of the balance sheet. IFRS: As per requirement of IFRS 9 where securities will fall under the category of fair Bangladesh Bank: As per BRPD circular no. 14 dated 25 June 2003, o balance sheet B Cash flow from investing activities value through profit or loss account, any change in the fair value of assets is recognised through the profit and loss account. Securities designated as amortised cost are items (e.g. Letter of credit, Letter of guarantee etc.) must be disclosed separately on the face of the balance sheet. Income from investments 1,210,006,200 1,656,090,120 measured at eective interest rate method and interest income is recognised through the profit and loss account. Investments made during the year (19,485,786,234) (24,197,192,241) xv) Loans and advances/Investments net of provision Proceeds from sale of investments 23,246,973,953 24,106,697,029 Bangladesh Bank: HFT securities are revalued on the basis of mark to market and at IFRS: Loans and advances/Investments should be presented net of provision. Purchase of property, plant and equipment 10 (97,206,535) (59,039,751) year end any gains on revaluation of securities which have not matured as at the Proceeds from sale of property, plant and equipment 38,012,601 7,564,675 balance sheet date are recognised in other reserves as a part of equity. Any losses on Bangladesh Bank: As per BRPD 14, provision on loans and advances/investments are Net cash used in investing activities 4,911,999,985 1,514,119,832 revaluation of securities which have not matured as at the balance sheet date are presented separately as a liability and cannot be netted o against loans and advances. FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 Bangladesh Branches

3.2 Basis of measurement 4.7 Investments - income earned on the execution of a significant act is recognised as revenue when The financial statements of the Bank are prepared on the basis of historical cost except In accordance with Bangladesh Bank guideline the Bank has classified investment into the act is completed for investment in treasury bills and treasury bonds which have been "mark to market" the following categories: - income earned from services provided is recognised as revenue in accordance with the Department of O-Site Supervision (DOS) circular 05 (28 - Held to Maturity (HTM) January 2009) and the liability of defined benefit obligations which is recognised as the Exchange income - Held for Trading (HFT) present value of the defined benefit obligations less the net total of the plan assets and Exchange income includes all gains and losses from foreign currency transactions. other related items as required by IAS 19 and represents the financial performance and In accordance with DOS circular No.05 (26 May 2008) and DOS circular 5 (28 January financial position of the branches in operation within Bangladesh. 2009) treasury securities held for Statutory Liquidity Ratio (SLR) compliance could be Dividend income All balances of all branches are included in these financial statements. In addition, classified as either HTM or HFT. HTM securities which have not matured as at the Dividend income is recognised when the right to receive payment is established. separate sets of financial statements for Oshore Banking Unit (OBU) have been balance sheet date are amortised at the year end and gains or losses on amortisation prepared. are recognised in other reserve as a part of equity. Coupon interest on HTM securities 4.18 Employee benefits is recognised in profit and loss account. HFT securities are revalued on the basis of 3.3 Functional and presentation currency mark to market and at year end any gains on revaluation of securities which have not Short-term employee benefits matured as at the balance sheet date are recognised in other reserves as a part of Items included in the financial statements of the Bank are measured using the currency Short-term employee benefits are employee benefits which fall due wholly within of the primary economic environment in which the entity operates (‘the functional equity and any losses on revaluation of securities which have not matured as at the twelve months after the end of the period in which the employees render the related currency’). The financial statements of the Bank are presented in Bangladeshi Taka balance sheet date are charged in the profit and loss account. Interest on HFT securities service including salaries, bonuses and other allowances. Payments are charged as an (BDT) which is the Bank’s both functional and presentation currency. including amortisation of discount are recognised in the profit and loss account. expense in the profit and loss account as they fall due. Payments due are accrued as a The Bank's investments in shares (unquoted) are recorded at cost and income thereon liability in “Provisions for liabilities and charges” on an undiscounted basis. 3.4 Use of estimates and judgments is accounted for when the right to receive payment is established. Provisions are made The preparation of financial statements requires management to make judgments, for any loss arising from diminution in value of investments. Bonus share in their own Long term employee benefits estimates and assumptions that aect the application of accounting policies and the self will have no value as the fair value of each shareholder's interest should be Long-term employee benefits are employee benefits other than post-employment reported amounts of assets, liabilities, income and expenses. Actual results may dier unaected by the bonus issue, hence no accounting entries are passed in the book for benefits, which do not fall due wholly within twelve months after the period in which from these estimates. bonus share received. the employees render the related service. The Bank operates bonus schemes where Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to certain percentage of the bonus are vested on a yearly basis. The period between the 4.8 Provisions for other assets accounting estimates are recognised in the periods in which the estimate is revised and award date and the payable date is the vesting period. Payments due are accrued as a in any future periods aected. BRPD circular No.14 (25 June 2001) requires a provision of 100% on relevant other liability in “Provisions for liabilities and charges” over the vesting period. assets which are outstanding for one year and above. The Bank maintains provision in In particular, information about significant areas of estimation, uncertainty and critical line with this circular unless no provision is required based on objective assessment. Post-employment benefits judgments in applying accounting policies that have the most significant eect on the Post-employment benefits are employee benefits, which are payable after the amounts recognised in the financial statements are described below: 4.9 Fixed assets (Property, plant and equipment) completion of employment. The Bank operates a defined contribution plan, The - Provisions on loans and advances - as explained in note 4.3 Fixed assets (including assets acquired under finance leases where the Bank is the Hongkong and Shanghai Banking Corporation Limited Sta Provident Fund (PF) and a - Income tax - as explained in note 4.20 lessee) are stated at cost less any impairment losses and depreciation calculated on a defined benefit plan, The Hongkong and Shanghai Banking Corporation Limited straight-line basis, from the month in which the asset is recognised to the month prior Employees Gratuity Fund (GF), both of which have been set up under an irrevocable - Post-employment benefits - defined benefit plan - as explained in note 4.18 to the month in which the asset is disposed, so as to write o the assets over their trust deed and recognised by the Commissioner of Taxes and approved by the - Allocation of head oce expenses to the Bank useful lives, which are as follows: National Board of Revenue respectively. - Allocation of operating expenses to OBU - Furniture and fixtures 10 years 10% pa Under the PF, the Bank's contribution amounts to 10% of basic salary per month (as defined in the scheme trust deed) for each eligible member. Payments to the PF are 3.5 Reporting period - Equipment 5 to 7 years 14.28% to 20% pa charged as an expense in the profit and loss account as they fall due. These financial statements cover one calendar year from 01 January 2018 to 31 - Leasehold improvements 10 years 10% pa December 2018. These financial statements are authorised for issue by management of - Motor vehicles 5 years 20% pa Under the GF, the Bank's obligation to members of the scheme is to pay one month/ the Bank on 18 February 2019. - Computers 4 years 25% pa one and half month's last drawn basic salary based on length of service (as defined in the scheme trust deed) on discontinuation of the employment contract. Fixed assets are subject to an impairment review if there are events or changes in 3.6 Cash flow statement The defined benefit plan costs and the present value of defined benefit obligations are The cash flow statement has been prepared in accordance with IAS 7, Cash Flow circumstances which indicate that the carrying amount may be impaired. Repairs and maintenance are charged to the profit and loss account as incurred. calculated at the balance sheet date by the schemes actuaries using the Projected Unit Statements considering the requirements specified in BRPD circular No. 14 dated 25 Credit Method, this involves the use of estimates regarding demographic variables June 2003 issued by the Banking Regulation and Policy Department of Bangladesh 4.10 Intangible assets (such as employee turnover and mortality) and financial variables (such as future Bank. increases in salaries). Intangible assets include purchased computer software which are stated at cost less 3.7 Statement of changes in equity any impairment losses and amortisation calculated on a straight-line basis. In The net charge to the profit and loss account mainly comprises the current service cost, The statement of changes in equity reflects information about the increase or decrease accordance with the provisions of IAS 38 the cost of purchased software which is not plus the unwinding of the discount rate on plan liabilities, less the expected return on in net assets or wealth during the year. an integral part of the related hardware is booked under intangible assets. Intangible plan assets, and is presented in operating expenses. Past service costs are charged assets with finite useful life are amortised, generally on straight-line basis, over their immediately to the profit and loss account to the extent that the benefits have vested, 3.8 Liquidity statements useful lives as follows: and are otherwise recognised on a straight-line basis over the average period until the benefits vest. Actuarial gains and losses comprise experience adjustments (the eects The liquidity statement of assets and liabilities as on the reporting date has been - Purchased software 3 to 5 years 20% to 33.33% pa of dierences between the previous actuarial assumptions and what has actually prepared on residual maturity term as provided in the statement. Intangible assets are subject to an impairment review if there are events or changes in occurred), as well as the eects of changes in actuarial assumptions. Actuarial gains circumstances which indicate that the carrying amount may be impaired. Modification, 4 Significant accounting policies and losses are recognised in ‘shareholders’ equity’ in the period in which they arise. up-gradation and maintenance costs are charged to the profit and loss account as incurred. 4.1 Foreign currencies 4.19 Operating expenses - Depreciation is discussed in the accounting policies section on Fixed Assets (note According to IAS 21 "The Eects of Changes in Foreign Exchange Rates" transactions 4.11 Finance and operating leases in foreign currencies are recorded in the functional currency at the rate of exchange 4.9). Agreements which transfer to counterparties substantially all the risks and rewards prevailing on the date of the transaction. Monetary assets and liabilities denominated - Amortisation of software is discussed in the accounting policies section on incidental to the ownership of assets, but not necessarily legal title, are classified as in foreign currencies are translated into the functional currency at the rate of exchange Intangible Assets (note 4.10). finance leases. prevailing at the balance sheet date. Any resulting exchange dierences are included in - Rental payments are discussed in the accounting policies section on Finance and the profit and loss account except for exchange dierences on “Funds deposited with When the Bank is a lessee under finance leases, the leased assets are capitalised and Operating leases (note 4.11). Bangladesh Bank”, which is recognised directly in equity. included in “fixed assets” and the corresponding liability to the lessor is included in - Salaries and allowances are discussed in the accounting policies section on “Other liabilities”. A finance lease and its corresponding liability are recognised initially Employee Benefits (note 4.18). 4.2 Loans and advances at the fair value of the asset or, if lower, the present value of the minimum lease Loans and advances are non-derivative financial assets with fixed or determinable payments. Finance charges payable are recognised as interest expense over the period - Advertising costs are amortised over the period during which the benefit of the payments that are not quoted in an active market and that the Bank does not sell in the of the lease based on the interest rate implicit in the lease so as to give a constant rate advertising accrues. normal course of business. of interest on the remaining balance of the liability. - All other expenses are accounted for on an accrual basis. Loans and advances are measured at amortised cost. These are stated gross, with All other leases are classified as operating leases. When the Bank is the lessee under Operating expenses incurred centrally by the Bank are apportioned between the accumulated specific and general provisions for loans and advances being shown an operating lease, leased assets are not recognised in the balance sheet. Rentals Bangladesh Branches and Oshore banking unit on the basis of total operating income. under other liabilities. payable, including rent paid in advance, under operating leases are accounted for on a Group head oce expenses (HoE) are recognised in OBU to the extent as allowed straight-line basis over the period of the lease, unless another systematic basis is more through FE circular No.15 (10 June 2018). As per the said circular, foreign banking 4.3 Provisions on loans and advances representative of the time pattern of the user’s benefit, and are included in “Rent companies operating in Bangladesh are allowed to remit head oce expense up to At each balance sheet date and periodically throughout the year, the Bank reviews expenses”. 10% of the profit before tax in accordance with the Income Tax Ordinance (ITO) 1984. loans and advances to assess whether objective evidence that impairment of a loan or As the total amount of HoE is recognised in OBU, the remaining operating expenses is portfolio of loans has arisen supporting a change in the classification of loans and 4.12 Deposits by customers and banks allocated to OBU as such that the basis of apportionment as stated above remain advances, which may result in a change in the provision required in accordance with Deposits by customers and banks are recognised when the Bank enters into the unchanged. BRPD circular No.1 (20 February 2018), BRPD circular No.15 (27 September 2017), contractual provisions of the arrangements with counterparties, which is generally on BRPD circular No.16 (18 November 2014), BRPD circular No.14 (23 September 2012), trade date, and initially measured at the consideration received. 4.20 Income tax BRPD circular No. 19 (27 December 2012) and BRPD circular No. 05 (29 May 2013). The Income tax on the profit or loss for the year comprises current tax and deferred tax. guidance in the circular follows a formulaic approach whereby specified rates are 4.13 Provisions for liabilities and charges Income tax is recognised in the profit and loss account except to the extent that it applied to the various categories of loans as defined in the circular. The provisioning As per IAS 37, provisions are recognised when it is probable that an outflow of relates to items recognised directly in shareholders’ equity, in which case it is rates are as follows: economic benefits will be required to settle a current legal or constructive obligation as recognised in shareholders’ equity. General provision on: 2018 2017 a result of past events, and a reliable estimate can be made of the amount of the Current tax Unclassified general loans and advances/investments 1.00% 1.00% obligation. Current tax is the tax expected to be payable on the taxable profit for the year, Unclassified small and medium enterprise financing 0.25% 0.25% 4.14 Capital adequacy calculated using tax rates as prescribed in the Income Tax Ordinance (ITO) 1984 and Unclassified loans/investment for housing finance and According to Sub-section 2 of Section 13 of the Bank Company Act 1991, as amended relevant Statutory Regulatory Orders (SRO) and any adjustment to tax payable in on loans for professionals 1.00% 2.00% by BRPD circular No.11 (14 August 2008) and BRPD circular No. 18 (21 December respect of previous years. Currently the income tax rate applicable for banks is 40%. Unclassified consumer financing other than 2014) all banks are required to maintain with Bangladesh Bank the higher of BDT 4 The estimation of current tax provision involves making judgments regarding housing finance and loans for professionals 5.00% 5.00% billion or the minimum capital requirement calculated as 10% of risk weighted assets admissibility of certain expenses as well as estimating the amount of other expenses Unclassified agricultural loans 1.00% 2.50% (RWA). In addition to minimum capital requirement, Capital Conservation Buer (CCB) for tax purposes. at the rate of 1.875% of the total RWA is to be maintained in the form of Common Specific provision on: Equity Tier-1 Capital (CET-1). The banks incorporated outside Bangladesh are required Deferred tax Substandard loans and advances/investments to deposit the required capital in the form of cash or in unencumbered approved Deferred tax is recognised on temporary dierences between the carrying amounts of other than agricultural loans 20% 20% securities. Note 31 demonstrates the Bank’s compliance with the overall capital assets and liabilities in the balance sheet and the amounts attributed to such assets and requirements as disclosed above. The risk based capital adequacy framework in line Doubtful loans and advances/investment liabilities for tax purposes. Deferred tax liabilities are generally recognised for all taxable with Basel III has come into force from 01 January 2015 as per BRPD circular No. 18 other than agricultural loans 50% 50% temporary dierences and deferred tax assets are recognised to the extent that it is (21 December 2014). Substandard and doubtful agricultural loans 5% 5% probable that future taxable profits will be available against which deductible temporary dierences can be utilised. Deferred tax is calculated using the tax rates as Bad/loss and advances/investments 100% 100% 4.15 O setting financial assets and financial liabilities prescribed in the Income Tax Ordinance (ITO) 1984 and relevant Statutory Regulatory BRPD circular No.14 (23 September 2012) as amended by BRPD circular No. 19 (27 Financial assets and financial liabilities are oset and the net amount reported in the Orders (SRO) and BRPD circular No. 11 dated 12 December 2011 issued by the Banking December 2012) also provides scope for further provisioning based on qualitative balance sheet when there is a legally enforceable right to oset the recognised Regulation and Policy Department of Bangladesh Bank. judgments. In these circumstances impairment losses are calculated on individual amounts and there is an intention to settle on a net basis, or realise the asset and settle loans considered individually significant based on which specific provisions are raised. the liability simultaneously. 4.21 Reconciliation of inter-bank/inter-branch accounts If the specific provisions assessed under the qualitative methodology are higher than 4.16 Cash and cash equivalents Books of account with regard to inter-bank (in Bangladesh and outside Bangladesh) are the specific provisions assessed under the formulaic approach, the higher of the two is reconciled and no material dierences were found which may aect the financial recognised in liabilities under “Provision for loans and advances” with any movement For the purpose of the cash flow statement, cash and cash equivalents include highly statements significantly. in the provision charged/released in the profit and loss account. Classified loans are liquid investments that are readily convertible to known amounts of cash and which are categorised into sub-standard, doubtful and bad/loss based on the criteria stipulated by subject to an insignificant risk of change in value and normally those with less than 4.22 Contingent liabilities Bangladesh Bank guideline. three months maturity from the date of acquisition and include cash and balances at As per IAS 37, contingent liability is: central banks, treasury bills and other eligible bills and balances with other banks and 4.4 Loan write-o financial institutions. A possible obligation that arises from past events and the existence of which will be Loans are normally written o, when there is no realistic prospect of recovery of these confirmed only by the occurrence or non-occurrence of one or more uncertain future amounts and in accordance with BRPD circular No.13 (07 November 2013) and BRPD 4.17 Revenue recognition events not wholly within the control of the Bank; or circular No.2 (13 January 2003). A separate Debt Collection Unit (DCU) has been set up A present obligation that arises from past events but is not recognised because: which monitors loans written o and legal action taken through the money loan court. Interest income and expense These write-os do not undermine or aect the amount claimed against the borrower Interest income and expenses are recognised in the profit and loss account on accrual - it is not probable that an outflow of resources embodying economic benefits will be by the Bank. basis. In case of Amanah, mark-up on investments is taken into the income account required to settle the obligation; or proportionately from profit receivable accounts. Overdue/late payment charge on - the amount of the obligation cannot be measured with sucient reliability. The DCU maintains a separate record for all individual cases written o by each branch. investment is transferred to charity suspense account instead of income account. The DCU follow-up on the recovery eorts of these written o loans and reports to Contingent liabilities are not recognised but disclosed in the financial statements management on a periodic basis. Written o loans and advances are reported to the In accordance with BRPD circular No.14 (23 September 2012) as amended by BRPD unless the possibility of an outflow of resources embodying economic benefits is Credit Information Bureau (CIB) of Bangladesh Bank. circular No. 19 (27 December 2012) interest accrued on sub-standard loans and reliably estimated. doubtful loans are credited to an “Interest Suspense Account” which is included within Contingent assets are not recognised in the financial statements as this may results in 4.5 Provisions on balances with other banks and financial institutions (Nostro “Other liabilities”. Interest from loans and advances ceases to be accrued when they the recognition of income which may never be realised. accounts) are classified as bad/loss. It is then kept in interest suspense in a memorandum Provisions for unsettled transactions on nostro accounts made are reviewed on a account. Interest received on sub-standard loans, doubtful loans and bad/loss loans are 4.23 New accounting standards not yet adopted quarterly basis by management and certified by the Bank's external auditors on a retained in the “Interest Suspense Account” until the loan is no longer considered to be semi-annual basis in accordance with Bangladesh Bank Foreign Exchange Policy impaired. The Bank has consistently applied the accounting policies as set out in Note 4 to all Department (FEPD) circular No. 677 (13 September 2005). periods presented in these financial statements. The various amendments to standards, Interest income from investment including any consequential amendments to other standards, with the date of initial application of 1 January 2018 have been considered. However, these amendments 4.6 Provisions for o balance sheet exposures Interest income on investments in government and other securities and bonds is have no material impact on the financial statements of the Bank. As per BRPD circular No.14 (23 September 2012) the Bank has recognised 1% General accounted for on an accrual basis and as per Bangladesh Bank guidelines. Provision on the following o balance sheet exposures as defined in BRPD circular In December 2017, ICAB vide letter 1/1/ICAB-2017 decided to adopt IFRS replacing No.10 (24 November 2002) considering the exemption as provided through BRPD Interest expense on deposits BFRS eective for annual periods beginning on or after 1 January 2018. However, since circular No.01 (03 January 2018), BRPD circular No.7 (21 June 2018) and BRPD circular Interest expenses for all deposits are recognised in the profit and loss account on an issued BFRS have been adopted from IFRS without any major modification, such No.13 (18 October 2018). accrual basis. changes would not have any material impact on these financial statements. - Acceptances and endorsements A number of standards and amendments to standards are eective for annual periods - Letters of guarantee Commission and fee income beginning on or after 1 January 2019 and earlier application is permitted. However, the - Irrevocable letters of credit The Bank earns commission and fee income from a diverse range of services provided Bank has not early applied the following new standards in preparing these financial to its customers. Commission and fee income is accounted for as follows: - Foreign exchange contracts statements. FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 Bangladesh Branches

(a) IFRS 16 Leases 6.1 Segregation of balances with other banks and 9.2 Analysis of significant concentration of loans and IFRS 16, issued in January 2016 replaces existing leases guidance and eective for financial institutions based on types of account advances including bills purchased and discounted reporting period beginning on or after 1 January 2019. It will result in almost all leases 2018 2017 2018 2017 being recognised on the balance sheet, as the distinction between operating and BDT BDT BDT BDT finance leases is removed. Under the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals are recognised. The only exceptions Current account (including foreign currency nostro) 4,755,536,209 2,445,865,603 Advances to allied concerns of directors - - are short-term and low-value leases. The accounting for lessors will not significantly Short term deposit account 48,924,083 47,695,184 Advances to the chief executive ocer - - change. The Bank shall implement IFRS 16 subject to Bangladesh Bank approval. 4,804,460,292 2,493,560,787 Advances to other senior executives and sta of the Bank 1,148,661,660 1,219,675,962 Advances to customers' group 25,395,772,810 19,366,699,132 (b) IFRS 17 Insurance contract 6.2 Maturity grouping of balance with other Industrial advances 56,701,203,385 47,654,899,317 IFRS 17 was issued in May 2017 and applies to annual reporting periods beginning on banks and financial institutions 83,245,637,855 68,241,274,411 or after 1 January 2021. IFRS 17 establishes the principles for the recognition, Payable on demand 4,755,536,209 2,445,865,603 measurement, presentation and disclosure of insurance contracts within the scope of 9.3 Number of clients with amount of outstanding Payable within one month 48,924,083 47,695,184 the standard. The objective of IFRS 17 is to ensure that an entity provides relevant and classified loans to whom loans and advances More than one month but less than three months - - information that faithfully represents those contracts. The Bank has not yet assessed in sanctioned more than 10% of total capital of the Bank potential impact of IFRS 17 on its financial statements. More than three months but less than one year - - More than one year but less than five years - - Number of clients 92 74 (i) Cash in hand (including foreign currencies) More than five years - - Amount of outstanding advances 38,501,171,660 25,969,853,942 2018 2017 4,804,460,292 2,493,560,787 BDT BDT Amount of classified advances - -

Local currency 1,582,102,166 1,435,079,606 7 Money at call on short notice 9.4 Cash collateral against total outstanding Foreign currencies 9,195,340 21,837,249 loans and advances as at 31 December 3,484,980,066 2,195,753,716 1,591,297,506 1,456,916,855 Deposit with banks: The City Bank Limited - 380,000,000 9.5 Loans and advances including bills (ii) Balance with Bangladesh Bank and Pubali Bank Limited - 240,000,000 purchased and discounted its agent bank(s) (including foreign currencies) BRAC Bank Limited - 690,000,000 - 1,310,000,000 Loans 77,442,591,748 62,959,393,112 Bangladesh Bank - Local currency 20,208,666,124 8,684,748,445 Overdrafts 5,803,046,107 5,281,881,299 Bangladesh Bank Amanah - Local currency 5,000,000 30,000,000 8 Investments 83,245,637,855 68,241,274,411 Total - Local currency (Annexure - E) 20,213,666,124 8,714,748,445 Held to Maturity Securities (HTM) 9.6 Particulars of loans and advances Bangladesh Bank - Foreign currencies clearing and 30 day Bangladesh Bank bills - 1,248,275,190 industry-wise classification capital accounts (Annexure - E) 23,947,752,530 17,804,965,306 91 day Treasury bills - 596,608,361 44,161,418,654 26,519,713,751 182 day Treasury bills 494,039,844 7,558,466 45,752,716,160 27,976,630,606 Readymade garments 13,509,078,870 9,224,527,537 364 day Treasury bills 5,326,902,823 4,215,017,524 Textile industries 10,579,145,186 5,800,787,315 (iii) Cash Reserve Ratio and Statutory Liquidity Ratio 2 year Government bonds 999,859,615 1,207,542,113 Agriculture and agro processing 16,302,502,948 12,815,664,967 5 year Government bonds 1,092,398,696 3,278,371,335 Steel and metal 6,488,984,593 5,714,676,079 Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) have been calculated and 7,913,200,978 10,553,372,989 maintained in accordance with the Section 33 of the Bank Company Act 1991 and the Leather and leather products - 438,068 following BB circulars: Trade 1,917,064,125 1,785,428,844 Held for Trading Securities (HFT) Chemical and pharmaceuticals 6,613,811,668 6,944,017,010 - BCD circular no.13 24 May 1992 7 day Bangladesh Bank bills - 4,298,788,592 Petroleum and coal products 275,045,489 283,211,146 - BRPD circular no.12 20 September 1999 14 day Treasury bills 2,498,965,203 - Cement industries 4,566,645,703 5,016,522,358 91 day Treasury bills 4,492,672,016 - - BRPD circular no.22 06 November 2003 Telecommunication 4,006,885,417 3,506,062,500 182 day Treasury bills 3,583,883,835 - - BRPD circular no.11 and 12 25 August 2005 Non Government Organization (NGO) 1,860,941,942 1,632,476,386 364 day Treasury bills 5,851,342,176 12,812,659,168 Power and energy 877,679,281 742,188,910 - BRPD circular no.1 12 January 2009 2 year Government bonds 3,300,229,019 3,386,935,870 Retail loans 5,220,622,474 6,417,449,477 - MPD circular no.1 04 May 2010 5 year Government bonds 849,767,005 351,526,256 Sta loans 1,148,661,660 1,219,675,962 - MPD circular no. 4 and 5 01 December 2010 20,576,859,255 20,849,909,886 Others 9,878,568,499 7,138,147,852 - DOS circular no.1 19 January 2014 Prize bonds 2,002,900 1,643,900 83,245,637,855 68,241,274,411 - MPD circular no.1 23 June 2014 9.7 Classification of loans and advances - MPD circular no.1 03 April 2018 Government securities (HTM, HFT, Prize bonds) 28,492,063,133 31,404,926,775 - BRPD circular no.15 26 July 2018 Unclassified: Standard 81,706,514,172 66,599,118,858 - DOS circular no.23 07 October 2018 Other investment Shares of Central Depository Bangladesh Limited Special Mention Account 63,265,055 68,910,957 According to Monetary Policy Department (MPD) circular no.1 (03 April 2018), (3,000,000 unquoted ordinary shares including 81,769,779,227 66,668,029,815 minimum average 5.5% CRR requirement on a bi-weekly basis and no less than 5% of 2,400,000 bonus shares @ Tk 10 each). As per last Classified: average total demand and time liabilities (ATDTL) on any given day is to be complied. audited financial statement of CDBL, book value Substandard 170,055,974 219,594,196 Based on ATDTL, SLR requirement is set at 13% for conventional and 5.5% for Islamic per share is higher than the cost price of the investment. 6,000,000 6,000,000 Doubtful 28,974,502 30,522,795 banking branch/windows respectively. 6,000,000 6,000,000 Bad/Loss 1,276,828,152 1,323,127,605 CRR and SLR requirements are calculated based on the ATDTL of two months prior to 28,498,063,133 31,410,926,775 1,475,858,628 1,573,244,596 the reporting month (e.g. CRR and SLR requirements for the month of December 2018 83,245,637,855 68,241,274,411 has been calculated on the basis of ATDTL of the month of October 2018. 8.1 Maturity grouping of investments Portrayed below in note 5 (iv) and (v), based on the cash balances of period end and of 9.8 Particulars of loans and advances the last two weeks of the financial year ended on 31 December 2018, the Bank Payable on demand 2,002,900 1,643,900 demonstrates compliance with the CRR. In note 5 (vi), the Bank demonstrates Payable within one month 13,300,085,022 7,907,584,707 i) Loans considered good in respect of which the Bank is compliance with the SLR based on period end cash balances of the financial year More than one month but less than three months 2,848,087,310 2,105,847,527 fully secured; 79,409,627,445 64,263,636,218 ended on 31 December 2018. More than three month but less than one year 12,341,887,901 15,962,153,472 More than one year but less than five years - 5,427,697,169 ii) Loans considered good against which the Bank holds (iv) Cash Reserve Ratio (CRR): Daily 5.00% (2017: 6.00%) More than five years 6,000,000 6,000,000 no security other than the debtor's personal guarantee; 2,687,348,749 2,757,962,231 28,498,063,133 31,410,926,775 of average total demand and time liabilities iii) Loans considered good secured by the personal including Amanah undertakings of one or more parties in addition to the 8.2 Outstanding repo as at 31 December 2018 2017 personal guarantee of the debtor; - - BDT BDT Counterparty name Agreement date Reversal date Amount Amount iv) Loans adversely classified; provision not maintained n/a n/a n/a - - Required reserve 5,848,569,114 6,414,564,064 there against; - - Actual reserve held with Bangladesh Bank 20,393,571,633 8,858,334,588 Surplus 14,545,002,519 2,443,770,524 8.3 Outstanding reverse repo as at 31 December v) Loans due by directors or ocers of the banking company or any of these either separately or jointly with Counterparty name Agreement date Reversal date Amount Amount (v) Cash Reserve Ratio (CRR): Bi-weekly 5.50% any other persons; 1,148,661,660 1,219,675,962 (2017: 6.50%) of average total demand and time n/a n/a n/a - - liabilities including Amanah vi) Loans due from companies or firms in which the 8.4 Overall transaction of repo and reverse repo directors of the Bank have interests as directors, Required reserve 6,433,426,026 6,949,111,069 partners or managing agents or in case of private Bi-weekly average reserve held with Bangladesh Bank Minimum Maximum Daily Average companies as members; - - (Annexure - D) 17,284,692,998 8,300,894,194 Outstanding Outstanding Outstanding vii) Maximum total amount of advance including temporary Surplus 10,851,266,972 1,351,783,125 BDT BDT BDT 2018 advance made at any time during the year to directors or managers or ocers of the Bank or any of them (vi) Statutory Liquidity Ratio (SLR): 13.00% and 5.50% Securities sold under repo: of average total demand and time liabilities of i) with Bangladesh Bank - - - either separately or jointly with any other person; 1,148,661,660 1,219,675,962 ii) with other banks and financial institutions - - - Conventional banking and Amanah respectively viii) Maximum total amount of advances, including temporary advances granted during the year to the Securities purchased under reverse repo: - - - Required reserve 15,206,279,698 13,897,278,318 companies or firms in which the directors of the Bank i) with Bangladesh Bank - - - Actual reserve held with Bangladesh Bank 44,041,503,350 34,769,423,246 have interest as directors, partners or managing agents ii) with other banks and financial institutions - - - Surplus 28,835,223,652 20,872,144,928 or in case of private companies as members; - -

6 Balance with other banks and financial institutions 2017 ix) Due from other banking companies; - - Securities sold under repo: In Bangladesh - current account i) with Bangladesh Bank - - - x) Classified loans and advances: IFIC Bank Limited - 1,229 ii) with other banks and financial institutions - - - a) Classified loans and advances on which no interest is Sonali Bank local oce 54,121,011 45,545,152 credited to income: United Commercial Bank 1,071,727 986,000 Securities purchased under reverse repo: Increase/(Decrease) of provision (specific) 45,783,500 (3,782,942) Standard Chartered Bank 446,156 39,982,040 i) with Bangladesh Bank - - - Amount of loans written o 229,811,807 184,493,595 Pubali Bank Limited 50,000,000 - ii) with other banks and financial institutions - - - Amount realised against the loan previously written o 45,711,521 51,179,191 105,638,894 86,514,421 b) Provision on classified loans and advances 9 Loans and advances (For movement see note 14.3) 720,084,005 674,300,505 Short term deposit 2018 2017 c) Interest creditable to the interest suspense account IFIC Bank Limited 12,270,525 11,953,231 BDT BDT (note 14.4) 361,143,504 394,035,137 Prime Bank Limited 4,569,775 4,555,170 Sonali Bank 27,411,331 26,615,240 Loans, cash credits, overdrafts: xi) Cumulative amount of written o loans United Commercial Bank 4,672,452 4,571,543 Opening balance 2,227,385,786 2,042,892,191 48,924,083 47,695,184 In Bangladesh: Amount written o during the year 229,811,807 184,493,595 154,562,977 134,209,605 Sta loans 1,148,661,660 1,219,675,962 2,457,197,593 2,227,385,786 Home mortgage loans 1,770,872,388 2,254,032,364 The amount of written o loan for which law suit Outside Bangladesh - current account Car loans 5,400,806 5,232,321 has been filed 1,643,927,819 1,416,943,379 HSBC Hong Kong 20,716,281 9,619,933 Personal loans 3,175,943,876 3,887,282,316 HSBC Hong Kong Global ATM settlement account 18,518,044 5,919,601 Overdraft for retail 268,405,403 270,902,477 9.9 Geographical analysis of loans and advances HSBC Hong Kong 3,233,153 3,815,793 Overdraft for corporate 5,534,640,703 5,010,978,823 Settlement account with HSBC Hong Kong 172,453,743 70,495,580 Term loans 13,168,622,301 8,563,322,204 Dhaka division 71,917,739,996 57,549,628,747 HSBC Japan 5,282,883 28,961,170 Import loans 18,980,565,029 12,615,695,524 HSBC Singapore 887,808 5,808,556 Chattogram division 11,327,897,859 10,691,645,664 Working Capital 37,997,940,380 34,080,598,289 83,245,637,855 68,241,274,411 HSBC India 1,437,999,096 566,655,033 82,051,052,546 67,907,720,280 Credit Suisse AG Switzerland 74,717,976 6,274,508 Outside Bangladesh: - - 9.10 Bills purchased and discounted HSBC Bank PLC UK 118,150,813 164,516,807 82,051,052,546 67,907,720,280 HSBC Bank USA 1,300,360,536 923,719,949 Bills purchased and discounted (note 9.10) 1,194,585,309 333,554,131 Inside Bangladesh 62,907,439 57,984,491 SCB Pakistan 70,262,248 218,957,944 83,245,637,855 68,241,274,411 HSBC Sri Lanka 204,804,267 131,916,049 Outside Bangladesh 1,131,677,870 275,569,640 HSBC Bank Australia TT account 621,796 378,445 9.1 Maturity grouping of loans and advances 1,194,585,309 333,554,131 HSBC Bank Australia DD account 26,271 783,814 including bills purchased and discounted HSBC Bank Canada 1,534,613 2,439,914 9.11 Maturity analysis of bills purchased HSBC France 608,880,189 - Payable on demand 2,176,840,924 688,779,982 and discounted Danske Bank Denmark 50,475 73,060 Payable within one month 14,540,707,621 17,617,180,417 HSBC Bank PLC UK 545,135,563 149,965,082 More than one month but less than three months 21,190,007,424 13,870,084,637 Payable within one month 1,113,619,890 213,081,478 HSBC Bank India 65,943,865 68,456,031 More than three months but less than one year 28,519,497,158 22,044,414,753 More than one month but less than three months 79,855,743 90,507,766 HSBC Dubai 317,695 593,913 More than one year but less than five years 14,027,772,107 11,071,135,157 More than three months but less than six months 1,109,676 28,369,994 (For detail see Annexure - B) 4,649,897,315 2,359,351,182 More than five years 2,790,812,621 2,949,679,465 More than six months - 1,594,893 4,804,460,292 2,493,560,787 83,245,637,855 68,241,274,411 1,194,585,309 333,554,131 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 Bangladesh Branches

10 Fixed assets including premises, furniture and fixtures The deferred tax will be reversed as soon as the related bad loan is either recovered or 12.2 Other deposits - Vostro account written o. Though the expected time frame of recovery is unknown, the bad loans 2018 2017 Furniture and Equipment Motor Computers Total must be written o within 5 years of being classified as per the central bank directives. BDT BDT 2018 fixtures vehicles So the deferred tax is expected to be reversed within five years. The following table BDT BDT BDT BDT BDT shows the year of origin that the Bank recognised the deferred tax assets on such Bank of New York, New York 142 142 Cost specific provision. The amount recognised and realised in the current year profit and Deutsche Bank AG, London 332,348 54,858,554 HSBC Bank plc, London 60,607,741 270,004,630 Balance as at 1 January 274,375,885 741,651,897 67,377,147 344,506,574 1,427,911,503 loss is shown in the note 11.4. Addition during the year 2,435,016 41,870,542 31,997,997 20,902,980 97,206,535 Pershing LLC, New Jersey 91,018 91,018 Prime Bank, Dhaka 99,240 99,240 Disposals/adjustment (15,262,855) (70,344,977) (41,248,430) - (126,856,262) Year of loan classification Year of deferred tax recognition Deferred tax amount Balance as at 31 December 261,548,046 713,177,462 58,126,714 365,409,554 1,398,261,776 United Commercial Bank Limited, Dhaka - 5,430 2018 2017 Pubali Bank Limited, Dhaka 595,064 590,440 BDT BDT Accumulated Depreciation and impairment charges IFIC Bank, Dhaka 1,900,854 -

Balance as at 1 January 191,919,006 579,876,688 54,830,498 267,441,822 1,094,068,014 HSBC Bank, Hong Kong - 484,114,947 Depreciation charge 2011 2012 15,004,537 15,942,321 HSBC Bank, Singapore 697,872 3,296,935 for the year 40,742,095 63,713,943 9,577,970 525,026 114,559,034 2013 2014 110,862,076 115,784,013 64,324,279 813,061,336 Disposals/adjustments (14,971,910) (65,318,177) (22,918,451) - (103,208,538) Total 125,866,613 131,726,334 Balance as at 31 December 217,689,191 578,272,454 41,490,017 267,966,848 1,105,418,510 12.3 Classification based on type of security Net book value as at Fixed assets and intangible assets Secured - - 31 December 2018 43,858,855 134,905,008 16,636,697 97,442,706 292,843,266 As per local tax regulation, accounting depreciation (depreciation rates and calculation Unsecured 9,259,657,680 6,252,156,882 methodology are given in note 4.9) is not considered as allowable expense for 9,259,657,680 6,252,156,882 2017 calculation of tax liability. However, the tax authorities allow tax depreciation at

dierent rates as given below: 12.4 Maturity grouping of borrowings from Cost Furniture and fixtures 10% other banks, financial institutions and agents Balance as at 1 January 268,391,775 738,271,375 72,413,948 342,921,302 1,421,998,400 Equipment 10% Addition during the year 31,414,763 24,085,026 - 3,539,962 59,039,751 Payable on demand 63,729,215 812,470,896 Disposals/adjustment (25,430,653) (20,704,504) (5,036,801) (1,954,690) (53,126,648) Motor vehicles 20% Payable within one month 1,108,548,928 260,488,906

Balance as at 31 December 274,375,885 741,651,897 67,377,147 344,506,574 1,427,911,503 Computers 30% More than one month but less than three months 2,381,197,443 1,138,062,663

Intangible assets: More than three months but less than one year 5,706,182,094 4,041,134,417 Accumulated Depreciation and impairment charges More than one year but less than five years - - Balance as at 1 January 181,679,070 533,753,829 50,118,059 252,768,828 1,018,319,786 Software (Developed in Bangladesh) 50% Over five years - - Depreciation charge Software (Imported) 10% 9,259,657,680 6,252,156,882 for the year 32,290,667 66,207,510 9,749,240 16,470,196 124,717,613 Disposals/adjustments (22,050,731) (20,084,651) (5,036,801) (1,797,202) (48,969,385) Therefore temporary dierence arises due to the dierent depreciation rates and 13 Deposits and other accounts Balance as at 31 December 191,919,006 579,876,688 54,830,498 267,441,822 1,094,068,014 methodology against which the Bank recognises deferred tax. This is a regular item as Net book value as at there is a dierence between the tax depreciation rate and the accounting depreciation Current deposits and other accounts: 31 December 2017 82,456,879 161,775,209 12,546,649 77,064,752 333,843,489 Current account 33,061,871,197 34,478,436,080 rate. However, the outstanding amount of deferred tax will be automatically released Sundry deposits* 6,812,221,513 6,455,060,844 with the expiry of the economic useful life of the assets. Costs of BDT 34,092,100 (2017: BDT 50,429,200), accumulated depreciation of BDT 39,874,092,710 40,933,496,924 32,387,495 (2017: BDT 40,043,150) and net book value of BDT 1,704,605 (2017: BDT Bills payable: 10,386,050) included within motor vehicles above relate to assets acquired under Actuarial gain/(losses) Cashiers order issued 514,748,137 767,868,062 finance leases, where the lease period is no more than 5 years. The Bank has the The bank recognises deferred tax assets/(liabilities) on actuarial gain/ (loss) arises due Drawings payable 1,940,930,631 1,216,039,438 option to purchase these assets on expiry of the lease at a predetermined terminal to changes in the present value of the defined benefit obligation and fair value of plan 2,455,678,768 1,983,907,500 value. assets resulting from experience adjustments and the eect of changes in actuarial assumptions. Deferred tax relating to actuarial gains and losses is recognised directly Saving deposits 19,871,514,757 12,396,346,924 11 Other assets in other reserve as a part of equity. This is a regular item as the calculation of actuarial 2018 2017 gain/loss and deferred tax thereon is recognised on a yearly basis. Term deposits: Classification of other assets BDT BDT Short term deposits 17,109,743,549 11,108,648,230 Term deposits 38,509,497,064 31,407,253,895 a) Income generating other assets Unrealised interest on amortisation of HTM and revaluation of HFT securities 55,619,240,613 42,515,902,125 Oshore Unit, Dhaka (2017: USD52,500,000) - 4,341,377,250 The dierence between IFRS and Bangladesh Bank guideline on recognition of 117,820,526,848 97,829,653,473 - 4,341,377,250 unrealised interest on the amortisation of Held to Maturity (HTM) securities and revaluation gain of Held for Trading (HFT) securities creates a temporary dierence on • Sundry deposits include BDT76,792,573 which had remained unclaimed for more b) Non-income generating other assets which the Bank recognises deferred tax. Deferred tax relating to unrealised interest on than 10 years as of 31 December 2018. As per BRPD circular No. 10 (12 September 2018) unclaimed deposits for 10 years or more are required to deposit to the Oshore Unit, Dhaka (2018: USD19,808,221; the amortisation of HTM securities and revaluation of HFT securities is recognised Bangladesh Bank by April of the following year. Accordingly, the unclaimed amount 2017: USD25,779,374) 1,652,940,542 2,131,771,198 directly in other reserves as a part of equity and subsequently recognised in the profit will be deposited to Bangladesh Bank by April 2019. Stamp in hand 4,364,437 1,666,795 and loss account on maturity of the securities. The related deferred tax will be released Intangible assets (note 11.1) 8,359,093 8,951,514 at the maturity of such securities. 13.1 Maturity analysis of deposits and other accounts Other debtors (note 11.2) 181,500,452 61,157,512 2018 2017 Deferred tax (note 11.3) 254,372,901 313,283,126 11.4 Movement of deferred tax BDT BDT Rent paid in advance 357,625,741 418,483,119 2018 2017 Other prepayments 87,797,297 89,664,504 BDT BDT Payable on demand 77,746,271,783 53,295,229,504 Refundable deposits 4,574,412 4,603,214 Payable within one month 4,212,035,034 15,562,760,145 Accrued interest on Bangladesh Bank foreign currency Balance as at 1 January 313,283,126 295,653,703 More than one month but less than three months 11,833,196,338 6,937,119,157 capital and clearing account 35,966,118 14,742,292 (Charge)/credit to profit and loss account (note 11.4.1) 13,142,337 18,644,835 More than three months but less than one year 21,873,410,540 16,618,741,565 Accrued coupon interest on More than one year but less than five years 2,155,613,153 5,335,371,067 Bangladesh government treasury bond 180,810,409 262,048,229 (Charge)/credit to profit and loss account - opening balance adjustment due to corporate tax rate Over five years - 80,432,035 Interest on balance with other banks and 117,820,526,848 97,829,653,473 financial institutions - 1,743,987 change to 40% from 42.50% during 2018 (Note 11.4.1) (12,916,543) - (Charge)/credit to reserves (note 11.4.2) (53,624,143) (1,015,412) Commission receivable 104,500,868 76,437,364 14 Other liabilities Encashment of Bangladesh Sanchayapatra (Charge)/credit to reserves - opening balance awaiting for reimbursement from Bangladesh Bank 2,196,715,894 1,306,417,222 adjustment due to corporate tax rate change to 40% Oshore Banking Unit, Dhaka (USD10,000,000) 834,472,000 - Net surplus asset of defined benefit schemes (Note 24.2) 98,742,872 - from 42.50% during 2018 (Note 11.4.2) (5,511,876) - Accrued interest on customer deposits and borrowings 1,402,257,099 1,034,865,185 Unrealised gain on foreign exchange contracts 19,635,829 10,388,876 Balance as at 31 December 254,372,901 313,283,126 Deferred income 168,648,041 168,454,827 5,187,906,865 4,701,358,952 Obligation under finance lease - principal only (note 14.1) 2,328,037 13,378,687 5,187,906,865 9,042,736,202 11.4.1 Deferred tax (charged)/credited to profit and loss account Provisions for liabilities and charges (note 14.2) 861,943,978 780,368,560 Dierence Other creditors 299,894,624 387,350,060 11.1 Intangible assets (Purchased software) Items in course of transmission 1,294,672,164 637,999,482 Dierence between tax Provision for loans and advances and o balance sheet between tax amortisation Cost exposures (note 14.3) 3,549,817,140 3,177,900,233 depreciation and accounting Specific Balance as at 1 January 47,412,554 50,277,137 Interest suspense account (note 14.4) 361,143,504 394,035,137 and accounting amortisation provision on Acquisition during the year 7,140,160 2,912,415 Interest received on non performing advances 386,841,599 287,779,219 depreciation (intangible loans and Disposals/adjustment (5,753,776) (5,776,998) Provision for taxation (note 14.5) 797,178,788 519,108,028 (fixed assets) assets) advances Total Balance as at 31 December 48,798,938 47,412,554 Net liability of defined benefit schemes (note 24.2 - 17,181,548 BDT BDT BDT BDT Unrealised loss on foreign exchange contracts 35,454,228 27,074,961 Accumulated amortisation 2018 9,994,651,202 7,445,495,927 Balance as at 1 January 38,461,040 35,396,804 Balance as at 1 January 89,046,239 (1,191,341) 131,726,334 219,581,232 Charge for the year 7,732,581 8,841,234 (Charge)/credit to profit 14.1 Obligation under finance leases Disposals/adjustment (5,753,776) (5,776,998) and loss account 9,649,809 1,603,641 1,888,887 13,142,337 Present Balance as at 31 December 40,439,845 38,461,040 (Charge)/credit to profit Total future Future value of Net book value as at 31 December 8,359,093 8,951,514 and loss account - opening minimum interest finance lease balance adjustment due to payments charges obligation 11.2 Other debtors corporate tax rate change BDT BDT BDT to 40% from 42.50% 2018 Petty cash 110,000 110,000 during 2018 (Note 11.4) (5,238,014) 70,079 (7,748,608) (12,916,543) Lease obligation: Security charges recoverable - 24,815,849 Balance as at 31 December 93,458,034 482,379 125,866,613 219,807,026 Within one year 2,383,799 (55,762) 2,328,037 Recoverable interest on deposits 2,500,000 - More than one year but less than five years - - - Others 178,890,452 36,231,663 2017 More than five years - - - 181,500,452 61,157,512 Balance as at 1 January 73,479,238 (2,473,657) 129,930,816 200,936,397 2,383,799 (55,762) 2,328,037 (Charge)/credit to profit 11.3 Deferred tax and loss account 15,567,001 1,282,316 1,795,518 18,644,835 2017 Balance as at 31 December 89,046,239 (1,191,341) 131,726,334 219,581,232 Lease obligation: Deferred tax balances are presented in the balance sheet after osetting asset and Within one year 11,781,648 (1,277,622) 10,504,026 11.4.2 Deferred tax (charged)/credited to reserves liability balances as HSBC Bangladesh has the legal right to set o against each other More than one year but and intends to settle on a net basis under the local tax jurisdiction. Deferred tax assets Unrealised Unrealised less than five years 2,945,412 (70,751) 2,874,661 and liabilities are attributable to the following: interest on interest on More than five years - - - Actuarial revaluation of revaluation of 14,727,060 (1,348,373) 13,378,687 Deferred tax assets Deferred tax liabilities Net deferred tax gains/(losses) HTM securities HFT securities Total 2018 2017 2018 2017 2018 2017 BDT BDT BDT BDT BDT BDT BDT BDT BDT BDT 14.2 Provision for liabilities and charges 2018 2018 2017 Specific provisions on Balance as at 1 January 88,170,695 5,531,199 - 93,701,894 BDT BDT loans and advances 125,866,613 131,726,334 - - 125,866,613 131,726,334 (Charge)/credit to reserves (47,178,973) (6,445,170) - (53,624,143) Fixed assets 93,458,034 89,046,239 - - 93,458,034 89,046,239 (Charge)/Credit to reserves - Balance as at 1 January 780,368,560 665,405,717 Intangible assets 482,379 - - (1,191,341) 482,379 (1,191,341) opening balance adjustment Net charge to profit and loss account 853,748,597 775,147,810 Actuarial (gain)/losses 35,805,211 88,170,695 - - 35,805,211 88,170,695 due to corporate tax rate Provision released (772,173,179) (660,184,967) Unrealised interest on change to 40% from 42.50% Balance as at 31 December 861,943,978 780,368,560 amortisation of in last year (Note 11.4) (5,186,511) (325,365) - (5,511,876) HTM securities - 5,531,199 (1,239,336) (1,239,336) 5,531,199 Balance as at 31 December 35,805,211 (1,239,336) - 34,565,875 14.3 Provision for loans and advances and o balance sheet exposures Unrealised interest General General Specific on revaluation of 2017 provision on provision on o Total provision on HFT securities - - - - - Balance as at 1 January 52,598,932 42,553,426 (435,052) 94,717,306 loans and balance sheet general loans and Total Total 255,612,237 314,474,467 (1,239,336) (1,191,341) 254,372,901 313,283,126 (Charge)/credit to reserves 35,571,763 (37,022,227) 435,052 (1,015,412) advances exposures provisions advances provision Balance as at 31 December 88,170,695 5,531,199 - 93,701,894 BDT BDT BDT BDT BDT Deferred tax is calculated using the tax rates expected to apply in the periods in which the assets will be realised or the liabilities settled, based on tax rates and laws enacted, 12 Borrowings from other banks, financial institutions and agents 2018 by the balance sheet date. Following are the descriptions for each individual item of the 2018 2017 Balance as at 1 January 868,734,233 1,634,865,495 2,503,599,728 674,300,505 3,177,900,233 Written o (net of deferred tax that are recognised by the Bank as a temporary dierence with expected BDT BDT recovery) during the year - - - (60,155,650) (60,155,650) time of realisation. In Bangladesh: Release during the year - - - (61,797,309) (61,797,309) Provision made during Term borrowings (note 12.1) 9,195,333,401 5,439,095,546 Specific provisions on loans and advances the year 95,639,303 230,494,104 326,133,407 167,736,459 493,869,866 Other deposits-vostro account (note 12.2) 64,324,279 813,061,336 As per local tax rules, provisions for bad loans are not tax allowable. Hence these Balance as at 31 December 964,373,536 1,865,359,599 2,829,733,135 720,084,005 3,549,817,140 9,259,657,680 6,252,156,882 impairment charges are added back to income at the time of computation of total Outside Bangladesh: - - income. However, the tax oce will allow the loan write o as a tax allowable expense 2017 9,259,657,680 6,252,156,882 Balance as at 1 January 834,942,526 1,440,069,973 2,275,012,499 678,083,447 2,953,095,946 provided that legal action has been instigated. Therefore this item creates a temporary Written o (net of dierence, as at some point of time in the future the Bank will either make recovery or 12.1 Term borrowings recovery) during the year - - - (60,551,886) (60,551,886) write o the loan. In accordance with IAS 12, the Bank recognises the deferred tax on Release during the year - - - (160,030,590) (160,030,590) specific provision which creates a deductible temporary dierence to the extent that it Foreign currency borrowing from Bangladesh Bank Provision made during is probable that taxable profit will be available against which the deductible temporary under export development funds 9,195,333,401 5,439,095,546 the year 33,791,707 194,795,522 228,587,229 216,799,534 445,386,763 dierence can be utilised. Balance as at 31 December 868,734,233 1,634,865,495 2,503,599,728 674,300,505 3,177,900,233 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 Bangladesh Branches

14.3.1 Required and maintained provision for loans 18 Contingent liabilities 24.2.2 Changes in the present value of and advances and o balance sheet exposures 2018 2017 defined benefit obligations 2018 2017 BDT BDT 2018 2017 BDT BDT BDT BDT Required general provision Acceptances and endorsements 87,675,262,477 71,300,858,731 On loans and advances at 0.25% to 5% under dierent 87,675,262,477 71,300,858,731 At 1 January 853,502,000 745,438,000 categories of unclassified loans/investments Letters of guarantee: Current service cost 107,547,000 99,094,000 (standard/SMA) 964,373,536 868,734,233 Money for which the Bank is contingently liable in Interest cost 58,244,000 54,341,000 On o balance sheet exposures @ 1% 1,865,359,599 1,634,865,495 respect of guarantees given favouring Government 41,713,761,971 28,174,653,332 Actuarial (gains)/losses (56,163,000) 51,306,000 2,829,733,135 2,503,599,728 Bank and other financial institutions 240,075,658 38,402,368 Experience (gains)/losses 33,685,864 (23,256,380) Others 14,765,582,427 1,930,553,894 Past service cost 2,023,000 (4,437,000) Required specific provision 56,719,420,056 30,143,609,594 Benefits paid (75,220,864) (68,983,620) Others At 31 December (note 24.2.1) 923,618,000 853,502,000 On substandard loans and advances/investments Irrevocable letters of credit 65,888,926,453 74,176,407,128 other than agricultural loans @ 20% 9,185,097 13,795,879 Foreign exchange contracts - spot and forward 5,094,357,828 3,357,031,546 24.2.3 Changes in the fair value of plan assets On doubtful loans and advances/investment other 70,983,284,281 77,533,438,674 than agricultural loans @ 50% 5,897,883 9,613,058 At 1 January 836,320,452 807,517,722 On substandard and doubtful agricultural loans @ 5% - - 215,377,966,814 178,977,906,999 Expected returns on plan assets 60,805,000 62,713,000 On bad/loss and advances/investments @ 100% 705,001,025 650,891,568 Contributions by the Bank 104,985,988 90,721,995 720,084,005 674,300,505 19 Interest income and profit received Actuarial gains/(losses) 95,470,296 (55,648,645) Total required provision 3,549,817,140 3,177,900,233 Experience (gains)/losses - - Total maintained provision 3,549,817,140 3,177,900,233 Sta loans 47,559,668 50,280,171 Benefits paid (75,220,864) (68,983,620) Surplus/(Shortfall) - - Home mortgage loans 176,208,684 210,084,838 At 31 December (note 24.2.1) 1,022,360,872 836,320,452 Car loans 116,855 1,044,599 14.4 Interest suspense account Personal loans 364,233,686 479,611,175 24.2.4 Summary Overdraft 382,895,657 304,242,163 Balance as at 1 January 394,035,137 304,114,280 Term loans 1,062,401,886 795,093,618 Defined benefit obligations (note 24.2.2) (923,618,000) (853,502,000) Recoveries during the year (127,319,932) (36,363,960) Import loans 1,200,305,590 874,095,097 Fair value of plan assets (note 24.2.3) 1,022,360,872 836,320,452 Written o during the year (21,039,199) (79,503,286) Working Capital 3,340,860,645 2,032,172,447 Net assets/(liabilities) 98,742,872 (17,181,548) Provision made during the year 115,467,498 205,788,103 Export and import bills 51,895,944 19,019,605 Balance as at 31 December 361,143,504 394,035,137 Income from money market 45,407,278 44,333,841 Actuarial (gains)/losses due to experience and Income from Oshore Banking Unit (OBU) 6,057,529 70,497,824 assumptions (note 24.2.2 and 24.2.3) (151,633,296) 106,954,645 14.5 Provision for tax net of advance Other correspondent bank 1,432,387 1,468,359 Experience (gains)/losses (note 24.2.2 and 24.2.3) 33,685,864 (23,256,380) income tax paid Income from nostro accounts 143,118 175,596 Total net actuarial (gains)/losses (note 16) (117,947,432) 83,698,265 Income from Bangladesh Bank foreign currency account 396,710,826 103,741,260 Provision for tax 7,076,229,753 4,985,860,593 25 Legal and professional expenses Balance as at 1 January 3,512,396,489 3,742,116,977 Provision made during the year 20 Interest and profit paid on deposits Legal expenses 6,168,741 6,344,953 Onshore unit 2,375,688,268 2,233,225,723 and borrowings Other professional charges 25,445,603 120,260,396 Oshore unit 916,833,496 973,637,977 31,614,344 126,605,349 Saving accounts 578,172,404 134,641,676 3,292,521,764 3,206,863,700 Term deposits 1,364,642,403 1,151,762,127 26 Auditors' fee Marginal deposit 13,092,858 9,602,143 Adjustments made during the year Interest paid on finance lease 1,123,709 2,705,483 Statutory audit - current year 1,200,000 1,200,000 Onshore unit (2,233,225,723) (2,590,165,000) Interest on vostro and overdrawn nostro 370,526 178,587 1,200,000 1,200,000 Oshore unit (973,637,977) (846,419,188) Money market call borrowing 272,917 1,829,722 (3,206,863,700) (3,436,584,188) Money market term borrowing 284,386,862 178,849,763 27 Depreciation, impairment and Balance as at 31 December 3,598,054,553 3,512,396,489 Interest on borrowing from OBU 343,790 10,457 repair of Bank's assets 2,242,405,469 1,479,579,958 Advance income tax paid Repair and maintenance 250,009,257 302,012,175 Balance as at 1 January 2,993,288,461 3,420,571,220 21 Income from investment Depreciation on fixed assets (note 10) 114,559,034 124,717,613 Amount paid during the year 2,861,011,433 2,992,945,916 Amortisation of intangible assets (note 11.1) 7,732,581 8,841,234 Adjustments made during the year (3,053,424,129) (3,420,228,675) Interest on treasury bills/bonds 1,081,863,045 573,361,085 372,300,872 435,571,022 Balance as at 31 December 2,800,875,765 2,993,288,461 Interest on Bangladesh Bank bills 46,905,335 898,832,923 Net provision 797,178,788 519,108,028 Dividend on shares 7,500,000 15,000,000 28 Operating leases 1,136,268,380 1,487,194,008 There are no non-cancellable operating lease contracts. Whilst many operating lease Provision for income tax is on the basis of applicable income tax regulations of contracts have notice periods for cancellation ranging up to 6 months, there are no Bangladesh. Tax return for the financial year ended 31 December 2018 is expected to 22 Commission, exchange and brokerage minimum funding commitments under these contracts due to advance payments. be filed with the tax authorities by the due date of 15 September 2019. Exchange income/loss 1,046,509,884 1,390,505,774 The assessment for the accounting year 1997 (assessment year 1998-99) is yet to be 29 Other operating expenses Commission income: finalised. The Bank has filed an appeal against the order of Taxes Appellate Tribunal to Import LC 1,776,306,881 1,766,235,989 Charitable donation 25,220,416 34,123,230 the High Court relating to assessment year 1998-99. The assessing authority had Export LC 199,768,251 188,043,819 Subscription of corporate member fees 5,676,860 4,188,497 disallowed certain Group head oce charges. However, no provision is required, as the Remittances 15,993,061 18,006,490 Training expenses 73,960,775 56,676,053 Bank had adjusted the loss of 1996 with that of 1997. Account services 40,024,703 45,703,128 Entertainment expenses 22,760,390 16,664,030 Credit facilities 201,171,501 144,709,772 The assessment for the accounting years 2006, 2007, 2009, 2010, 2011, 2012, 2013 Sta entertainment expenses 26,081,758 25,978,279 Collection bills 309,612 551,835 and 2014 are yet to be finalised. The tax authorities have not accepted the Bank’s Outsource service cost 125,121,140 90,069,269 Global custody 95,538,858 94,348,913 excess profit computation for the above mentioned period on the grounds that they do Security expenses 96,508,814 106,715,513 Other commissions and charges 119,919,443 114,731,346 not consider various other components, including retained earnings to be part of Sta recruitment costs 1,158,430 370,580 2,449,032,310 2,372,331,292 capital of the Bank. Transportation and conveyance expenses 25,226,695 13,356,094 Commission paid (33,049,548) (35,468,451) Sta uniform 1,291,425 1,698,496 For accounting year 2006, 2009, 2010, 2011 and 2012 the Bank has filed reference 2,415,982,762 2,336,862,841 Generator and motor vehicles fuel and other expenses 5,994,269 4,441,990 application to the High Court against the order of Taxes Appellate Tribunal. For 3,462,492,646 3,727,368,615 Other oce expenses 152,923,084 90,756,096 accounting year 2007 and 2013 appeal has been filed against order of Deputy 561,924,056 445,038,127 Commissioner of Tax to the Commissioner of Tax (Appeal). 23 Other operating income Management believes that general provision, retained earnings and some of the other 30 Tax Profit/(loss) on disposals of fixed assets 14,364,877 3,407,412 components that has been disregarded by the tax authority are part of capital and are Other income 20,959,379 24,516,280 considered as core capital in the capital adequacy calculation as per the Bank Company Profit before tax 5,298,072,381 5,538,190,155 35,324,256 27,923,692 Act 1991. During 2013, there were some additional explanation included in the said act Notional tax on profit before tax, calculated at the rates relating to the definition of capital and subsequently Bangladesh Bank has also 24 Salaries and allowances provided some additional clarification to National Board of Revenue on the issue. of statutory tax rate @ 40% 2,119,228,952 2,353,730,816 Deferred tax (charge)/release (225,794) (18,644,835) Management believes both of these have strengthened the bank’s tax position as Short term employee benefits Tax charge/(release) for prior year (153,439,571) (16,355,513) stated above. The Bank's legal counsel has the same opinion. Hence no provision is Basic salary 1,051,747,530 975,220,515 Tax eect on allowable/non-allowable expenses 256,459,316 (120,505,093) made for the same. This is notable that the "Excess Profit Tax" related section 16C of Allowances 553,538,771 535,698,598 2,222,022,903 2,198,225,375 the Income Tax Ordinance 1984 has been omitted by Finance Act 2016. Bonus 446,973,420 434,894,267 Others 336,226,701 263,049,550 31 Capital adequacy under Basel III 15 Capital 2,388,486,422 2,208,862,930 2018 2017 Total Risk Weighted Assets (RWA) as on 31 December 124,620,548,943 103,824,948,075 BDT BDT Long term employee benefits 11.875% of RWA under Basel III Bonus 7,414,662 7,007,823 (including capital conservation buer) 14,798,690,187 11,680,306,658 Fund deposited with Bangladesh Bank at 1 January 3,072,581,767 2,934,634,949 7,414,662 7,007,823 Required capital: The higher of 11.875% of Exchange dierence: Post employment benefits RWA or BDT4 billion 14,798,690,187 11,680,306,658 (USD 35,938,625 × 83.4472-82.6929); Contribution to the defined benefit plan (note 24.1) 107,009,000 86,284,991 Contribution to the defined contribution plan 85,341,793 82,062,451 (2017: 82.6929-78.8545) 27,108,505 137,946,818 Actual Capital maintained 192,350,793 168,347,442 Funds deposited with Bangladesh Bank at 31 December 3,099,690,272 3,072,581,767 Common Equity Tier I 2,588,251,877 2,384,218,195 16 Other reserves Fund deposited with Bangladesh Bank 3,099,690,272 3,072,581,767 Retained earnings 27,658,950,379 26,335,857,369 24.1 Total expense recognised in the profit and Unrealised interest on amortisation of HTM securities Actuarial gain/(loss) (53,707,814) (119,289,763) loss account in employee benefits relating Opening balance (7,483,386) (57,572,284) Less: Regulatory adjustment for Deferred tax assets to the defined benefit plan Opening balance adjustment due to corporate as per the Bangladesh Bank guideline (249,318,905) (307,888,151) tax rate change to 40% from 42.50% during 2018 (325,365) - 30,455,613,932 28,981,261,222 Current service cost 107,547,000 99,094,000 Unrealised interest on amortisation of Additional Tier I - - Interest cost 58,244,000 (8,372,009) HTM securities during this year 6,344,777 (8,245,569) - - Expected returns on plan assets (60,805,000) - Unrealised interest on amortisation of Total Tier I 30,455,613,932 28,981,261,222 Past service cost 2,023,000 (4,437,000) HTM securities realised during this year 9,768,148 95,356,694 Contribution to the defined benefit plan (note 24) 107,009,000 86,284,991 15,787,560 87,111,125 Tier II General provision 2,829,733,135 2,503,599,728 Deferred tax liabilities (note 11.4.2) (6,445,170) (37,022,227) 24.2 Net assets/(liabilities) recognised on the Revaluation reserve on Government securities 16,989,823 33,979,646 9,342,390 50,088,898 balance sheet in respect of the defined 2,846,722,958 2,537,579,374 1,859,004 (7,483,386) benefit plan Unrealised interest on revaluation of HFT securities Total capital 33,302,336,890 31,518,840,596 Surplus 18,503,646,703 19,838,533,938 Opening balance - 588,599 The Hongkong and Shanghai Banking Corporation MTM reserve for HFT during this year - - Limited Employees Gratuity Fund (note 24.2.1) 98,742,872 (17,181,548) MTM reserve for HFT realised during this year - (1,023,651) % of Capital adequacy required Common Equity Tier - I 6.375% 5.750% - (1,023,651) 24.2.1 Defined benefit plans Tier - I 6.00% 6.00% Deferred tax assets/(liabilities) (note 11.4.2) - 435,052 The calculation of the net liability under the Bank's defined benefit plan is set out below Total 11.875% 11.250% - (588,599) together with the expected rates of return and plan assets used to measure the net - - defined benefit plan cost in each subsequent year. % of Capital adequacy maintained Actuarial gain/(loss): 2018 2017 Common Equity Tier - I 24.44% 27.91% Opening balance (119,289,762) (71,163,260) BDT BDT Tier - I 24.44% 27.91% Opening balance adjustment due to corporate Total 26.72% 30.36% tax rate change to 40% from 42.50% during 2018 (5,186,511) - Fair value of plan assets (note 24.2.3) Actuarial gain/(loss) during this year (note 24.2.4) 117,947,432 (83,698,265) Balance with Bank 1,022,360,872 836,320,452 32 Cash and cash equivalents Less: Deferred tax assets (note 11.4.2) (47,178,973) 35,571,763 1,022,360,872 836,320,452 65,581,948 (48,126,502) Cash in hand 1,591,297,506 1,456,916,855 (53,707,814) (119,289,762) Defined benefit obligation (note 24.2.2) Balance with Bangladesh Bank 44,161,418,654 26,519,713,751 (51,848,810) (126,773,148) Present value of funded obligations 923,618,000 853,502,000 Balance with other banks and financial institutions 4,804,460,292 2,493,560,787 Present value of unfunded obligations - - Money at call on short notice - 1,310,000,000 17 Profit and loss account 923,618,000 853,502,000 Prize bonds 2,002,900 1,643,900 Net assets/ (liabilities) 98,742,872 (17,181,548) 07 day Bangladesh Bank bills - 4,298,788,592 Opening balance 26,335,857,369 22,995,892,589 30 day Bangladesh Bank bills - 1,248,275,190 Profit for the year 3,076,049,478 3,339,964,780 Plan assets are not invested in any assets issued by the Bank or in any property 14 day Treasury bills 2,498,965,203 - Profit remitted to head oce (1,752,956,468) - occupied by the Bank. The rate of return expected on plan assets is based on the 91 day Treasury bills 4,492,672,016 596,608,361 Closing balance 27,658,950,379 26,335,857,369 expected rate paid by the Bank on the deposits placed by the Trustees of the Gratuity 57,550,816,572 37,925,507,436 Fund with the Bank and also investment return if any. FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 Bangladesh Branches

33 Amanah Banking licence issued by Bangladesh Bank. As at year end the balance with the OBU is disclosed HSBC follows a 3 Lines of Defence (LoD) model. As the First LoD, Business Risk and The Bank established an Islamic Banking Branch (Amanah branch) from 26 February in note 11, Other assets. Control Management teams are responsible for providing operational risk advice for their organizational area. They work closely with Risk Owners and Control Owners to ensure 2004, on Islamic Shariah Principles based banking. Following a strategic review of all The disclosure of the year end balance is considered to be the most meaningful business and operations around the world, the Group decided to restructure its Islamic operational risk management activities are eectively executed. The Second LoD review information to represent transactions during the year. The outstanding balance includes and challenge the activities of the First LoD to ensure that they have met the minimum banking business and no longer oers Shariah compliant products and services in loans made by the Bank to the OBU. These transactions arose in the ordinary course of Bangladesh. Under the restructuring procedure, the existing books of Amanah business requirements for risk management. The Second LoD consists of 'Risk Stewards' who are business and are on substantially the same terms, including interest rates and security, independent of the commercial risk-taking activities undertaken by the First LoD. Risk will run-o up to the maturity as per Bangladesh Bank approval letter ref no. BRPD as for comparable transactions with third party counterparties. Net interest income Stewards perform the specialist role of setting policies and the oversight of the First LoD (P-3)745(37)/2013-1693 dated 10 April 2013. received by the Bank from the OBU in 2018 amounted to BDT5,713,739 (2017: activities for their given risk type. BDT70,487,367) which is included in the net interest income disclosed in the profit and A separate set of financial statements for Amanah is required to prepare in accordance loss account. As Third LoD, the Global Internal Audit (GBL INA) function, which is centrally controlled with the Banking Regulation and Policy Department (BRPD) Circular No 15 (9 November from Group Internal Audit in UK, provides independent assurance with respect to the 2009). This is notable that the Bank discontinued Amanah business since 2013 and got Operating expenses incurred by the Bank for the operations of the Bank and OBU are design and operating eectiveness of the risk management and control frameworks dispensation from Bangladesh Bank vide letter ref no. DOS (SR)1153/127/2014-424 apportioned to each entity on the basis of total operating income and reported in the across the Group, focusing on the areas of greater risk to HSBC by using a risk-based dated 28 December 2014 for not preparing a separate set of financial statements for profit and loss account. Income tax assessed for the Bank and the OBU is paid by the approach. The Head of Country Audit team reports to the Head of International Audit , Amanah. However, as required by the dispensation letter of Bangladesh Bank, the Bank Bank and the element relating to the OBU is recharged back to the OBU as disclosed in Asia Pacific; who reports to the Global Head of Internal Audit, ASP who reports to the provided disclosures in note 33.1 to 33.4 to comply the disclosures requirement of note 14.5, Provision for tax net of advance tax paid. Regional Board Audit Committee. The country executive management is responsible for Amanah. As there is no Amanah operation at present, operating expense is not allocated 34.4 Transactions with post employment benefit plans ensuring the audit action plans sorted by the Internal Audit function are implemented to Amanah. within an appropriate and agreed timetable. GBL INA assesses both the design and The Bank has two post employment benefit schemes, the nature of which is disclosed in operating eectiveness of HSBC’s internal governance structures and processes and 33.1 Amanah Balance Sheet as at 31 December note 4.18, Employee benefits. There were no balances payable to these schemes or due controls to consider if they comply with relevant laws and regulations, internal policies 2018 2017 from these schemes to the Bank as at the end of 2018 (2017: Nil). The total contribution and are appropriate for the size, complexity and risk profile of the organization based on BDT BDT to these schemes in 2018 by the Bank is disclosed in note 24, salaries and allowances. the risk assessment and GBL INA audit methodology. Assets The responsibility for fund management and administration of these schemes rest with Cash in hand - - the Trustees of these schemes, however, these functions are delegated to the Bank's 36.1.5 Prevention of money laundering and terrorist financing Balance with Bangladesh Bank 5,000,000 30,000,000 Human Resources (HR) department. The Bank does not charge these schemes any fees HSBC is one of the leading members of the 'Wolfsburg Group of Banks' (International Investments 339,915,908 414,742,128 for the day to day fund management or administrative services. Anti-Money Laundering and Countering of Terrorist Financing standard setting body) Fixed assets - - and has very firm policies and procedures in place to combat money laundering and Other assets 73,255,409 - As allowed by the Trust Deed of these schemes, scheme funds may be deposited with terrorist financing throughout its operations across the world. 418,171,317 444,742,128 the Bank. As at 31 December 2018 the provident fund had placed deposit of BDT56,085,382 (2017: BDT33,628,425) and the gratuity fund had placed deposits of Robust Anti-Money Laundering (AML) and Countering of Terrorist Financing (CTF) BDT1,022,074,178 (2017: BDT835,636,315) with the Bank. Policies are embedded in framework in which the Bank operates. In addition, HSBC Liabilities Bangladesh has localised versions of specific Global Policy and Principles (GPP) taking Placement from banks and other financial institutions - - These transactions arose in the ordinary course of business and are on substantially the into account all Bangladesh Financial Intelligence Unit (BFIU) Master Circulars and Deposits and other accounts 14,883,249 14,486,511 same terms, including interest rates and security, as for comparable transactions with Guidance issued till date. These localised policies and procedures are approved by the Other liabilities 37,486,293 69,935,716 third party counterparties. Interest expense incurred by the Bank on deposits placed by country Financial Crime Risk Management Committee (FCRMC) and are strictly Retained earnings 365,801,775 360,319,901 the provident fund in 2018 amounted to BDT360,394 (2017: BDT180,179) and on deposit embedded in the Bank. The Financial Crime Risk management framework is also 418,171,317 444,742,128 placed by the gratuity fund in 2018 amounted to BDT9,944,979 (2017: BDT8,605,374), governed in Risk Management Meeting (RMM) and Executive Committee (EXCO). The both of which are included in the interest expense disclosed in the profit and loss Global AML Policy in general establishes principles to be adhered to in order to ensure O balance sheet items account. eective AML Risk Management, in accordance to the set three Lines of defense model. Acceptances and endorsements - - Letters of guarantee - - 35 Events after the balance sheet date As part of our ongoing commitment to adopt and enforce industry leading compliance Irrevocable letters of credit - - There were no material events after the balance sheet date that may require adjustment standards; Compliance function comprising of Financial Crime Compliance (FCC) Foreign exchange contracts - Spot and Forward - - or disclosure. department of HSBC has been providing guidance and advice to front lines to establish - - robust Financial Crime risk controls. The function consists of dedicated individuals 36 General providing in-depth focus on key risk areas i.e. Anti-Money Laundering, Fraud, Counter Terrorist Financing, Sanctions and Anti-Bribery and Corruption (AB&C) where necessary. 33.2 Amanah Profit and Loss Account for the year 36.1 Core risk management The function also consists of an assurance team, who perform on-going testing of AML, ended 31 December BRPD circular no.17 (7 October 2003), BRPD circular no.4 (5 March 2007) and DOS CTF, Sanctions and AB&C controls. FCC is led by the Country Head of FCC who is an Executive Committee member of the bank and reports directly to the Chief Executive Income from investments 37,806,243 47,137,143 Circular no. 04: Risk Management Guideline (08 October 2018) require banks to put in place an eective risk management system. Bangladesh Bank monitors the progress of Ocer (CEO). Apart from FCC, the Compliance function also includes Financial Crime Profit paid on deposits (1,415) (137) Threat Mitigation (FCTM) as a sub-function which specialises in all financial crime Net investment income 37,804,828 47,137,006 implementation of these guidelines through its on-site inspection teams through routine inspection. The risk management systems in place at the Bank are discussed below. related investigations, including Money Laundering, Sanctions and Fraud investigations Commission, exchange and brokerage 738,571 949,005 and also does intelligence gathering and analytical work to support informed decision Other operating income - - 36.1.1 Credit risk making and eective information sharing internally and externally regarding financial Total operating income 38,543,399 48,086,011 crime related issues. Salaries and allowances - - HSBC has historically sought to maintain a conservative, yet constructive and Rent, taxes, insurance, electricity etc. - - competitive credit risk culture. This has served the Group well, through successive The pivotal point of combating financial crime is to know our customers better, economic cycles and remains valid today. This culture is determined and underpinned by Legal expenses - - accordingly HSBC Bangladesh has robust policies and procedures for Know Your the disciplined credit risk control environment which the Group has put in place to Customer (KYC), Identification & Verification (ID&V), Customer Due Diligence (CDD), Postage, stamps, telecommunication etc. - - govern and manage credit risk, and which is embodied in the formal policies and Auditors' fee - - Customer Name Screening, Transaction Monitoring (TM)/Screening and Suspicious procedures adopted by HSBC Bangladesh. These are articulated through Group credit Activity Reporting (SAR), which are under continuous surveillance of Bank’s local and Stationery, printing and advertisement - - policies supplemented by Regional and Local Area Lending Guidelines, backed up by the Depreciation and repair of Bank's assets - - Global Compliance and Internal Audit teams. The Bank is also taking number of Bangladesh Bank’s regulations and guidelines. Formal policies and procedures cover all initiatives to continuously improve these processes as well as the Financial Crime risk Other operating expenses - - areas of credit lending and monitoring processes including: controls. As part of our continuous awareness program, bank has mandatory on-line Total operating expense - - AML, CTF and Sanctions training modules which are mandatory for all sta. Annual Profit before provision 38,543,399 48,086,011 - The Group credit risk policy framework - Governance and authorities refresher is also in place for all sta. Specific provision for classified investments (4,593,932) 11,280,546 - Risk appetite and evaluation of facilities 36.1.6 Information technology General provision for unclassified investments and - Key lending constraints, higher risk sectors and sustainability risk The Bank has its IT Department which includes Infrastructure Delivery, Application o balance sheet exposures (3,879,700) (2,326,232) - Risk rating systems Development and Maintenance and Cybersecurity team for the support, service, Total provision (8,473,632) 8,954,314 - Facility structures software development and cybersecurity of IT systems where the core system is Profit before tax 47,017,031 39,131,697 centralised in Hong Kong. Though much of the Bank's systems are built for Group Current Tax 15,417,359 20,436,554 - Lending to Banks, Non-Banks and Sovereigns purpose there are some sophisticated applications developed locally or purchased from Profit after tax for the year 31,599,672 18,695,143 - Personal lending third party vendors as and when required following a Risk Based Project Management - Corporate and commercial lending (RBPM) methodology. The IT department has a Performance Level Agreement (PLA) and 33.3 Amanah Assets and Liabilities Maturities Analysis as at 31 December 2018 Service Level Agreement (SLA) with global businesses and functions for service quality - Portfolio management and stress testing assurance which describes all the IT services with target service up-time and response Maturity Maturity Maturity Maturity Maturity - Monitoring, control and the management of problem exposures time for troubleshooting or any IT related requests. The IT department provides monthly Particulars within within within within over Total - Impairments and allowances reports to Risk Management Forum (RMF) chaired by in country Chief Operating Ocer 1 month 1 to 3 months 3 to 12 months 1 to 5 years 5 years (COO) for the senior management which covers the following: BDT BDT BDT BDT BDT BDT At the heart of these processes is a robust framework of accountability. HSBC operates Assets a system of personal credit authorities, not credit committee structures. However, the - Update on major IT related Risk issues and mitigation plan/timeline Cash in Hand ------Bank has set up a Risk Management Meeting (RMM) comprising all the members of the - Internal and external Audit Status and remediation progress related to IT Balance with Bangladesh Bank 5,000,000 - - - - 5,000,000 Asset Liability Committee (ALCO) and other risk related function heads to manage - Incident report Placement with other banks various risks within the Bank including credit risk. Relationship managers are held - Emerging Risk / Risk Management Status related to IT and financial institutions ------accountable for both the profitability and growth of their loan portfolios as well as the Money at call on short notice ------losses that may arise within them. HSBC Bangladesh has an approved internal ICT Security Policy (approved by Executive Investment - - - 339,915,908 - 339,915,908 Committee of the bank) as per Bangladesh bank (BB) ICT security guideline requirement. Fixed assets ------36.1.2 Asset liability management risk HSBC Bangladesh established ICT Steering Committee and ICT/ Cyber Governance Other assets - - - 73,255,409 - 73,255,409 For better management of asset and liability risk, the Bank has an established Asset Committee to comply with BB ICT Security guideline. These two committees look after Non-banking assets ------Liability Management Committee (ALCO) which meets at least once a month. The ICT related risk and controls, cyber security risk and controls, regulatory and legal Total assets 5,000,000 - - 413,171,317 - 418,171,317 members of ALCO, as at 2018 year end, were as follows: requirement related to ICT security etc. Beside, periodic training and various initiatives Mr. Francois de Maricourt (Chairman) Chief Executive Ocer are taken by Information Security Risk (ISR) team in Risk function to increase information Liabilities security awareness among all sta. Placement from other banks Mr. Farhanul Gani Choudhury Chief Financial Ocer and financial institutions ------Mr. Mahbub Ur Rahman Deputy CEO & Head of Corporate Banking The Bank has a robust Business Recovery Plan (BRP) in place to ensure business Deposits and other accounts 14,883,249 - - - - 14,883,249 Ahmed Saiful Islam Head of Retail Banking & Wealth Management continuity in case of any major disaster. This plan is reviewed and tested at least once in Other liabilities (including Mr. Bashar M Tareq Head of Global Markets a year to ensure that the bank can operate from the contingency site and findings are capital/shareholders' equity) - 95 87,115 403,200,858 - 403,288,068 Mohammad Omar Faruque Head of Balance Sheet Management addressed for further improvement. Mr. Saurav Saha Chief Risk Ocer Total liabilities 14,883,249 95 87,115 403,200,858 - 418,171,317 Safiqul Islam (Secretary) Head of Asset Liability and Capital Management 36.2 Audit Committee Net liquidity dierence (9,883,249) (95) (87,115) 9,970,460 - - The Committee's primary function is to formulate policy and guidelines for the strategic According to BRPD circular no.12 (23 December 2002), all banks are advised to 33.4 (i) Amanah Cash Reserve Ratio (CRR): management of the Bank using pertinent information that has been provided through constitute an audit committee comprising of members of the board. The audit Daily 5.00% (2017: 6.00%) of average 2018 2017 the ALCO process together with knowledge of the individual businesses managed by committee will assist the board in fulfilling its oversight responsibilities including total demand and time liabilities BDT BDT members of the Committee. ALCO regularly reviews the Bank’s overall asset and liability implementation of the objectives, strategies and overall business plans set by the board position, forward looking asset and liability pipeline, overall economic position, liquidity for eective functioning of the bank. The committee will review the financial reporting Required reserve 772,990 755,056 risk, capital adequacy, balance sheet risk, interest rate risk and makes necessary process, the system of internal control and management of financial risks, the audit Actual reserve held with Bangladesh Bank 5,000,000 30,000,000 changes in product and balance sheet mix as and when required. Specific process, and the bank's process for monitoring compliance with laws and regulations and its own code of business conduct. Surplus 4,227,010 29,244,944 responsibilities include reviewing liquidity limits, capital requirements management, managing balance sheet growth, optimising the allocation and utilisation of all The Bank, being a Branch of a foreign bank, does not have a local board of directors from ii) Amanah Cash Reserve Ratio (CRR): resources, understanding balance sheet dynamics, i.e. the interaction between asset whom to select an audit committee locally; however, the Bank has received a Bi-weekly 5.50% (2017: 6.50%) of average and liability portfolios, and issues such as Fund Transfer Pricing, Interest Rate Risk dispensation from Bangladesh Bank on 19 December 2006 with regards to this total demand and time liabilities Behaviouralisation, Liquidity Premium and Liquidity Recharges, asset and liability pricing requirement. The Bank has an Audit Committee in UK, comprising of at least three policy. independent non-executive directors of the Group. The committee meets on a regular Required reserve 850,289 817,977 The Bank has adopted International Basel III liquidity and funding framework which is basis with the senior management of the Group, and with the internal and external Bi-weekly average reserve held with Bangladesh Bank 5,000,000 30,000,000 also adopted by Bangladesh Bank (BB) to ensure financial flexibility to cope with auditors to consider and review the nature and scope of the reviews as well as the Surplus 4,149,711 29,182,023 unexpected future cash demands. ALCO monitors the liquidity and funding ratio on an eectiveness of the systems of internal control and compliance and the financial ongoing basis and ascertains liquidity requirements under various stress situations. In statements of the Group. (iii) Amanah Statutory Liquidity Ratio (SLR): order to ensure liquidity against all commitments, the Bank reviews the behavior The Group Head of Internal Audit reports to the Chairman of the Group Audit Committee 5.50% of average total demand and time liabilities patterns of liquidity requirements. The Bank has an approved Liquidity, Funding and and frequent meetings are held between them during the year. Administratively the Capital Plan which is reviewed and updated on an annual basis by ALCO. All regulatory Group Head of Internal Audit reports to the Group Chief Executive. Executive Required reserve 850,289 692,130 requirements including CRR, SLR, CAR, ICAAP and RWA are reviewed and approved by management is responsible for ensuring that issues raised by the Global Internal Audit Bi-weekly average reserve held with Bangladesh Bank 4,149,711 29,182,023 ALCO. function are addressed within an appropriate and agreed timetable. Confirmation to this Surplus 3,299,422 28,489,893 eect must be provided to Global Internal Audit. There are quarterly Townhalls (Global 36.1.3 Foreign exchange risk Alignment Sessions) arranged regularly to align all the country internal audit teams 34 Related party transactions Foreign exchange risk is defined as the potential change in earnings arising due to across the globe with the latest update from the HSBC Group Audit Committee. The The related parties of the Bank include HSBC Holdings plc, other group entities, change in market price and the position in the currency that is held during the change. Bank is subject to regular periodic regulatory and risk based audits by the internal audit post-employment benefit plans for HSBC employees, Key Management Personnel, close Such risk may arise from positions held in various foreign exchange products like spot of HSBC in liaison with the auditors from the regional and global teams, where family members of Key Management Personnel and entities which are controlled or and forward. In an eort to ensure such risks are managed eciently with caution and necessary. All internal audit reports are subject to quality assurance by the Global Quality higher authorities consent, Bangladesh Bank issued a guideline for foreign exchange jointly controlled by Key Management Personnel or their close family members. Control team prior final issuance. transactions in 2009, later revised in 2018 The Bank has a Functional Instruction Manual The Bank, not being incorporated in Bangladesh, operates in Bangladesh under the (FIM) covering foreign exchange risk policies and investment policy. The Bank has also 36.3 Disclosure on risk based capital (Basel III) banking licence issued by Bangladesh Bank and therefore the Key Management Personnel developed dierent strategies to handle foreign exchange risk by setting limits on net To comply with international best practice and to improve risk management in the of the Bank for the purposes of IAS 24 are defined as those persons having authority and open positions by currencies, mismatch limits by currency and time buckets of forward banking sector as well as strengthen the ability of the sector to absorb shocks, responsibility for planning, directing and controlling the Bank, being members of the foreign exchange transactions, overall gross limits for forward (FWD) transaction, Bangladesh Bank implemented Basel III capital requirements from 2015 through BRPD Board of Directors of the Group, Group Managing Directors, and close members of their maximum loss limits per day and per month, as well as Value at Risk (VAR) limits. All the circular no. 18 dated 21 December 2014 on revised Risk Based Capital Adequacy families and companies they control, or significantly influence, or for which significant limits mentioned here are monitored and managed on a daily basis. And there are Guideline for Banks under BASEL III Accord. As per the directive of Bangladesh Bank all voting power is held. separated independent Product control team to monitor and highlight any scheduled banks are required to report risk based capital adequacy for banks under concerns/issues. Basel III. All scheduled banks are also required to make disclosures in both qualitative 34.1 Transactions with key management personnel The Bank maintains various nostro accounts in order to conduct operations in dierent and quantitative terms. As a branch of the world's leading financial services institutions, There were no transactions between the Bank and the key management personnel of the currencies including BDT. The senior management of the Bank set limits for handling HSBC Bangladesh has made disclosures as per Pillar-III, market discipline of the revised Bank in 2018 (2017: BDT nil). nostro account transactions. capital adequacy framework of Bangladesh Bank (For details see annexure - F). 34.2 Transactions, arrangements and agreements involving group entities As at 31 December 2018 the Bank has no unadjusted debit entry exceeding three 36.4 Exchange rates The Bank provides and receives certain banking and financial services to/from entities months, as a result, in accordance with (FEPD) circular No. 677 (13 September 2005) no The assets and liabilities as at 31 December in foreign currencies have been converted to provision on nostro balances are maintained. within the Group. As at year end the balances with these entities is disclosed in note 6, BDT at the following rates: 2018 2017 Balance with other banks and financial institutions and note 12, Borrowings from other 36.1.4 Internal control and compliance BDT BDT banks, financial institutions and agents. Eective internal controls are the foundation of safe and sound banking. A properly USD 1 = 83.45 82.69 The disclosure of the year end balance is considered to be the most meaningful designed and consistently enforced system of operational and financial internal control HKD 1 = 10.66 10.58 information to represent transactions during the year. The outstanding balances includes helps a bank’s management to protect the bank's resources, produce reliable assurance SGD 1 = 60.76 61.80 loans made to or deposits by the Bank and arose in the ordinary course of business and over the financial reports and compliance with laws and regulations. Eective internal GBP 1 = 105.40 111.11 are on substantially the same terms, including interest rates and security, as for control system not only reduces the possibility of significant errors and irregularities but AUD 1 = 58.82 64.33 comparable transactions with third party counterparties. Interest income received by the also helps to detect and prevent exceptions in a timely manner. The Group policy EUR 1 = 95.09 98.71 Bank from these entities during 2018 amounted to BDT143,118 (2017: BDT175,596) and requires the Bank to comply with the requirements of relevant rules and regulations of CHF 1 = 84.18 84.39 interest expense paid to these entities during 2018 amounted to BDT297,279 (2017: the jurisdictions within which, the Bank operates. Therefore, in line with the Bangladesh JPY 1 = 0.75 0.73 BDT178,587), both of which is included in the net interest income disclosed in the profit Bank Guideline on ‘Internal Control & Compliance’, the Bank has prepared and CAD 1 = 61.35 65.54 and loss account. implemented appropriate Internal Control and Compliance guidelines. In addition, the Group has robust manuals, policy and procedures, entitled Group Standards Manual NOK 1 = 9.53 9.99 34.3 Transactions with other related parties of the Bank (GSM), Functional Instruction Manual (FIM), Business Instruction Manual (BIM) and the AED 1 = 22.72 22.51 The Bank provides certain banking and financial services and administrative services to Compliance Ocer’s Handbook, which bring together all the standards and principles CNY 1 = 12.15 12.65 the Oshore Banking Unit (OBU) of HSBC operating in Bangladesh under the banking we use in the conduct of our business, regardless of its location or nature. DKK 1 = 12.74 13.26 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 Bangladesh Branches

36.5 Credit ratings - Additional Tier I capital can be maximum up to 1.5% of the total RWA or 33.33% Key Financial Highlights (Consolidated) According to BRPD circular no.6 (05 July 2006) it is mandatory from January 2007 for all of CET 1, whichever is higher. banks to be credit rated by a credit rating agency. Credit Rating Agency of Bangladesh as at 31 December 2018 [Figures in BDT] - Tier II capital can be maximum up to 4% of the total RWA or 88.89% of CET1, Limited (CRAB) has issued the following ratings for the Bank for 2018: Sl No Particulars Onshore Oshore Consolidated whichever is higher. Long-term AAA 1 Total assets 167,781,627,571 141,507,957,799 309,289,585,370 - In addition to minimum CRAR, Capital Conservation Buer (CCB) @ 2.50% of the Short-term ST - 1 2 Total deposits 117,820,526,848 2,636,471,643 120,456,998,491 total RWA will be maintained in the form of CET1 in a phased manner from 2016 3 Total loans and advances 83,245,637,855 139,822,834,972 223,068,472,827 to 2019. According to CRAB, financial institutions rated in this category are adjudged to be of 4 Total contingent liabilities 215,377,966,814 10,006,189,217 225,384,156,031 highest quality, oer highest safety and highest credit quality. This level of rating 5 Net interest income 4,833,824,284 3,325,732,329 8,159,556,613 Tier I capital of the Bank includes funds deposited with Bangladesh Bank, actuarial indicates exceptionally strong capacity for timely payment of financial commitments, 6 Non interest income 4,634,085,282 461,474,114 5,095,559,396 gain/(loss) and retained earnings. Tier 1 capital is also called ‘Core Capital’ of the Bank. highly unlikely to be adversely aected by foreseeable events. The short term rating 7 Total operating income 9,467,909,566 3,787,206,443 13,255,116,009 According to BRPD letter ref no.BRPD (BFIS)661/14B(P)/2015-18014 dated 24 December indicates highest certainty with regard to the Bank’s capacity to meet its financial 8 Profit before tax and provisions 5,730,144,938 2,292,083,795 8,022,228,733 2015, 5% of deferred tax recognised on specific provision shall be allowable as CET 1 commitments. Safety is almost like risk free government short term securities. 9 Profit after tax and provisions 3,076,049,478 1,375,250,327 4,451,299,805 capital whilst all other deferred tax assets created on other items shall be deducted from the retained earnings when calculating the capital adequacy ratio. 36.6 BRPD circular No.06 (19 March 2015) as amended by BRPD circular No. 03 (16 Tier II capital consists of general provision and revaluation reserve for Held to Maturity February 2016) requires to pay rebate to the eligible good borrowers. Accordingly the Annexure - D Bi weekly average balance of Bangladesh Bank statement (HTM) and Held for Trading (HFT) securities. According to BRPD circular no. 05 (31 May Bank has paid an amount of BDT368,778,237 as a rebate to the eligible good borrowers 2016) the full general provision maintained against unclassified loans and advances for the period March 2015 to December 2016. The bank has also made adequate for the month of December 2018 (except Fast Track Electricity Project LC) will be considered as Tier II capital. Revaluation provision for good borrower rebate for the year 2017 and 2018. Actual balance held Actual balance held Total actual balance Average balance reserve for securities shown as Tier II capital as on 31 December 2014 will be nullified in 36.7 The Bank has sought external legal opinion, whereby it was stated that there is Date with Bangladesh Bank with Bangladesh Bank held with held with a phased manner at the rate of 20% starting from 2015 and will be fully adjusted by significant ambiguity around the inclusion of Banking and Non-Banking Financial (Conventional) (Islamic) Bangladesh Bank Bangladesh Bank 2020. Institutions within the scope of Chapter XV: Worker's Profit Participation Fund ('WPPF') 15-Dec-18 15,149,265,853 5,000,000 15,154,265,853 Quantitative disclosures: under the Bangladesh Labour Act, 2006 (the 'Act') and the subsequent amendments 16-Dec-18 15,149,265,853 5,000,000 15,154,265,853 2018 2017 thereof. As per the Act and amendments thereof, an employer is required to pay 5% of 17-Dec-18 13,050,574,393 5,000,000 13,055,574,393 The details of capital structure are provided as under: BDT BDT its net profit (a defined under the Act) to the 1) Worker's Participation Fund 2) Worker's 18-Dec-18 12,915,181,461 5,000,000 2,920,181,461 Welfare Fund and 3) Labour Trust Foundation Fund for further appropriate disbursement 19-Dec-18 13,516,362,155 5,000,000 13,521,362,155 Common Equity Tier I of the funds to all members (i.e. 'Beneficiaries', as defined under the Act) as prescribed 20-Dec-18 14,691,987,552 5,000,000 14,696,987,552 Fund deposited with Bangladesh Bank 3,099,690,272 3,072,581,767 under the Act. As per the external legal opinion sought by the Bank, the inclusion of 21-Dec-18 14,691,987,552 5,000,000 14,696,987,552 Retained earnings 27,658,950,379 26,335,857,369 Banks within the scope of the WPPF under the Bangladesh Labour Act, 2006 is in 22-Dec-18 14,691,987,552 5,000,000 14,696,987,552 Actuarial gain/(loss) (53,707,814) (119,289,763) contradiction with the relevant provisions under The Bank Company Act, 1991. These 23-Dec-18 15,444,912,949 5,000,000 15,449,912,949 Less: Regulatory adjustment for deferred ambiguities are yet to be settled and the Bank is seeking clarifications from appropriate 24-Dec-18 19,088,517,443 5,000,000 19,093,517,443 tax assets as per the Bangladesh Bank guideline (249,318,905) (307,888,151) Authorities. On the basis of the facts currently known and external legal opinions, 25-Dec-18 19,088,517,443 5,000,000 19,093,517,443 30,455,613,932 28,981,261,222 management believes that the possibility of a legal obligation for payments out of WPPF 26-Dec-18 24,308,362,598 5,000,000 24,313,362,598 is low at the current stage and hence, no provision has been made for the same. 27-Dec-18 20,393,571,633 5,000,000 20,398,571,633 Additional Tier I - - 28-Dec-18 20,393,571,633 5,000,000 20,398,571,633 - - 36.8 The net amount of foreign currency exposure as at 31 December 2018 was BDT 29-Dec-18 20,393,571,633 5,000,000 20,398,571,633 Total Tier I 30,455,613,932 28,981,261,222 1,786,270,904. 30-Dec-18 20,393,571,633 5,000,000 20,398,571,633 31-Dec-18 20,393,571,633 5,000,000 20,398,571,633 Tier II 36.9 The Bank has no secured liabilities against which assets has been pledged as 17,284,692,998 General provision 2,829,733,135 2,503,599,728 security. Revaluation reserve for securities 16,989,823 33,979,646 2,846,722,958 2,537,579,374 36.10 The figures appearing in these financial statements have been rounded o to the Annexure - E Total capital 33,302,336,890 31,518,840,596 nearest Taka (BDT). Reconciliation between Bangladesh Bank's statement and 4 Capital adequacy 36.11 Previous year's figures have been rearranged, wherever necessary, to conform Bank's statement as at 31 December 2018 with current year's presentation. Qualitative disclosures: In order to comply with the CRR and SLR requirements, the Bank considers the actual balances held with Bangladesh Bank according to their books of accounts. However, when The Bank has adopted the Standardised Approach for computation of the capital charge preparing the statutory accounts the Bank considers the actual balances held with for credit risk and market risk, and the Basic Indicator Approach for operational risk. Bangladesh Bank according to the Bank's books of accounts. This results in reconciling Assessment of capital adequacy is carried out in conjunction with the capital adequacy reporting to the Bangladesh Bank. Francois de Maricourt Farhanul Gani Choudhury dierences between the Bank's statutory accounts and CRR and SLR requirements. The reconciling items relates to clearing of the following: Chief Executive Ocer, Bangladesh Chief Financial Ocer, Bangladesh The Bank has a capital adequacy ratio of 26.72% as against the minimum regulatory - Bangladesh Bank cheques requirement of 11.875% including capital conservation buer. Tier I capital adequacy Dhaka, 18 February 2019 - Foreign currency demand drafts ratio is 24.44% against the minimum regulatory requirement of 6%. The Bank’s policy is to manage and maintain its capital with the objective of maintaining a strong capital - Government bonds ratio. The Bank maintains capital levels that are sucient to absorb all material risks. The Annexure - A As per Bangladesh As per Bank's Reconciling Bank also ensures that the capital levels comply with all regulatory requirements, satisfy Statement of Liquidity Bank statement general ledger dierence (Assets and Liabilities Maturity Analysis) external rating agencies and other stakeholders including depositors. The whole Local currency BDT BDT BDT objective of the capital management process in the Bank is to ensure that the Bank As at 31 December 2018 remains adequately capitalised at all times. Maturity within Maturity within Maturity within Maturity within Maturity over Bangladesh Bank Dhaka 20,052,679,153 19,872,535,182 180,143,971 Total The Bank has in place a capital adequacy framework by which the Bank’s annual budget Particulars 1 month 1 to 3 months 3 to 12 months 1 to 5 years 5 years Bangladesh Bank Chattogram 336,746,211 335,364,069 1,382,142 Bangladesh Bank Sylhet 4,146,268 766,873 3,379,395 projections and the capital required to achieve the business objectives are linked in a BDT BDT BDT BDT BDT BDT cohesive way. Capital requirements are assessed for credit, market and operational risks. Assets Bangladesh Bank Amanah 5,000,000 5,000,000 - Sonali Bank as an agent of Bangladesh bank - - - The Bank’s capital adequacy ratio is periodically assessed and reviewed by the ALCO Cash in hand* 39,749,639,332 - - - 6,003,076,828 45,752,716,160 and reported to head oce. The composition of capital in terms of Tier I and II are also Balance with other banks and 20,398,571,632 20,213,666,124 184,905,508 financial institutions (note 6.2) 4,804,460,292 - - - - 4,804,460,292 analysed to ensure capital stability and to reduce volatility in the capital structure. The Bank credited but Bangladesh Bank had not debited 13,933,316,288 Bank has a profit remittance policy to ensure that the Bank has enough capital to comply Money at call on short notice ------Bank debited but Bangladesh Bank had not credited (13,333,311,544) Investment (note 8.1) 13,302,087,922 2,848,087,310 12,341,887,901 - 6,000,000 28,498,063,133 with the regulatory requirement. The Bank's capital plan also ensures that adequate Loans and advances (note 9.1) 16,717,548,545 21,190,007,424 28,519,497,158 14,027,772,107 2,790,812,621 83,245,637,855 Bangladesh Bank credited but Bank had not debited 19,464,018,603 levels of capital are held considering the planned organic growth of the business. Bangladesh Bank debited but the bank had not credited (19,879,117,839) Fixed assets 152,684 3,273,548 24,320,688 211,964,043 53,132,303 292,843,266 Quantitative disclosures: Other assets 1,964,747,220 2,281,213,914 349,250,695 589,856,780 2,838,256 5,187,906,865 184,905,508 2018 2017 Non-banking assets ------As per Bangladesh As per Bank's general ledger Reconciling Total assets 76,538,635,995 26,322,582,196 41,234,956,442 14,829,592,930 8,855,860,008 167,781,627,571 BDT BDT Bank statement dierence Risk Weighted Risk Weighted Liabilities Foreign currency USD USD BDT USD Assets Assets Borrowings from other banks and financial institutions (note 12.4) 1,172,278,143 2,381,197,443 5,706,182,094 - - 9,259,657,680 Deposits and other accounts USD clearing account 224,409,865 210,415,422 17,558,577,840 13,994,443 On balance sheet items 59,518,679,338 50,288,164,090 (note 13.1) 81,958,306,816 11,833,196,338 21,873,410,540 2,155,613,154 - 117,820,526,848 USD capital account 71,938,625 71,938,625 6,003,076,828 - O balance sheet items 47,172,763,239 34,234,968,238 Other liabilities (including Total 296,348,490 282,354,047 23,561,654,668 13,994,443 Total credit risk 106,691,442,577 84,523,132,328 capital/shareholders' equity) 1,439,636,943 1,422,851,252 2,427,988,518 32,311,276,058 3,099,690,272 40,701,443,043 Total liabilities 84,570,221,902 15,637,245,033 30,007,581,152 34,466,889,212 3,099,690,272 167,781,627,571 Bank credited but Bangladesh Bank had not debited 32,108,666 Market risk 2,153,824,676 1,475,194,880 Net liquidity dierence (8,031,585,907) 10,685,337,163 11,227,375,290 (19,637,296,282) 5,756,169,736 0 Bank debited but Bangladesh Bank had not credited (57,176,474) Bangladesh Bank credited but Bank had not debited 61,801,129 Operational risk 15,775,281,690 17,826,620,867 * Balance over 5 years represents foreign currency deposits with Bangladesh Bank held under lien as capital. Bangladesh Bank debited but the bank had not credited (22,738,878) 13,994,443 Total risk weighted assets 124,620,548,943 103,824,948,075 Annexure - B Balance with Other Banks and As per Bangladesh As per Bank's general ledger Reconciling Financial Institutions - Outside Bangladesh (Note -6) Bank statement dierence Detail of capital adequacy as at 31 December 2018 GBP GBP BDT GBP Capital requirement for credit risk 12,669,608,806 9,508,852,387 2018 2017 Bank Name Currency Foreign Local Foreign Local GBP clearing account 260,834 260,834 27,492,487 - Capital requirement for market risk 255,766,680 165,959,424 name currency Rate currency currency Rate currency Capital requirement for operational risk 1,873,314,701 2,005,494,848 HSBC Hong Kong HKD 1,944,193 10.6555 20,716,281 909,261 10.5800 9,619,933 Bank credited but Bangladesh Bank had not debited - Total required capital 14,798,690,187 11,680,306,659 HSBC Hong Kong Global ATM Bank debited but Bangladesh Bank had not credited - settlement account HKD 1,737,892 10.6555 18,518,044 559,511 10.5800 5,919,601 Bangladesh Bank credited but Bank had not debited - Common Equity Tier I capital 30,455,613,932 28,981,261,221 HSBC Hong Kong CNY 266,003 12.1546 3,233,153 301,603 12.6517 3,815,793 Bangladesh Bank debited but the bank had not credited - Settlement account with - Total Tier I capital 30,455,613,932 28,981,261,221 HSBC Hong Kong USD 2,066,621 83.4472 172,453,743 852,499 82.6929 70,495,580 Total Tier II capital 2,846,722,958 2,537,579,374 As per Bangladesh As per Bank's general ledger Reconciling HSBC Japan JPY 7,019,601 0.7526 5,282,883 39,531,714 0.7326 28,961,170 Total regulatory capital 33,302,336,890 31,518,840,595 Bank statement dierence HSBC Singapore SGD 14,612 60.7596 887,808 93,991 61.7987 5,808,556 Surplus 18,503,646,703 19,838,533,936 HSBC India USD 17,232,443 83.4472 1,437,999,096 6,852,523 82.6929 566,655,033 EUR EUR BDT EUR Credit Suisse AG Switzerland CHF 887,602 84.1796 74,717,976 74,352 84.3891 6,274,508 % of Capital adequacy required HSBC Bank PLC UK GBP 1,120,953 105.4022 118,150,813 1,480,717 111.1062 164,516,807 EUR clearing account 2,291,519 3,771,297 358,605,375 (1,479,778) Common Equity Tier I 6.375% 5.750% HSBC Bank USA USD 15,583,034 83.4472 1,300,360,536 11,170,487 82.6929 923,719,949 Tier I 6.000% 6.000% SCB Pakistan USD 841,996 83.4472 70,262,248 2,647,845 82.6929 218,957,944 Bank credited but Bangladesh Bank had not debited 188 Total 11.875% 11.250% HSBC Sri Lanka USD 2,454,298 83.4472 204,804,267 1,595,252 82.6929 131,916,049 Bank debited but Bangladesh Bank had not credited (1,526,978) HSBC Bank Australia TT account AUD 10,571 58.8219 621,796 5,883 64.3268 378,445 Bangladesh Bank credited but Bank had not debited 47,200 % of Capital adequacy maintained HSBC Bank Australia DD account AUD 447 58.8219 26,271 12,185 64.3268 783,814 Bangladesh Bank debited but the bank had not credited (188) Common Equity Tier I 24.44% 27.91% (1,479,778) HSBC Bank Canada CAD 25,014 61.3492 1,534,613 37,227 65.5409 2,439,914 Tier I 24.44% 27.91% Total (BDT) 23,947,752,530 HSBC France EUR 6,403,328 95.0881 608,880,189 - - - Total 26.72% 30.36% Danske Bank Denmark DKK 3,963 12.7373 50,475 5,511 13.2576 73,060 HSBC Bank PLC UK EUR 5,732,953 95.0881 545,135,563 1,519,241 98.7105 149,965,082 Annexure - F 5 Credit Risk HSBC Bank India EUR 693,503 95.0881 65,943,865 693,503 98.7105 68,456,031 Disclosures on risk based capital under Pillar - III of Basel III HSBC Dubai AED 13,984 22.7179 317,695 26,381 22.5131 593,913 Qualitative disclosures: Total 4,649,897,315 2,359,351,182 for the year ended 31 December 2018 Credit risk is the risk of financial loss if a customer or counterparty fails to meet a 1 Disclosure policy payment obligation under a contract. It arises principally from direct lending, trade Annexure - C Financial Highlights (Onshore) The following detailed qualitative and quantitative disclosures are provided in finance and leasing business, but also from o balance sheet products such as as at 31 December 2018 accordance with Bangladesh Bank rules and Basel III capital regulation under BRPD guarantees and credit derivatives, and from the holdings of debt securities. HSBC Sl Particulars Currency/ 2018 2017 Circular no. 18 (21 December 2014). The purpose of these requirements is to Bangladesh has standards, policies and procedures dedicated to controlling and No percentage complement the capital adequacy requirements and the Pillar III – supervisory review monitoring risk from all such activities. Among the risks the Bank engages in, credit risk process. These disclosures are intended for market participants to assess key 1 Fund deposited with Bangladesh Bank as capital BDT 3,099,690,272 3,072,581,767 generates the largest regulatory capital requirement. 2 Total capital including retained earnings BDT 33,302,336,890 31,518,840,595 information about the Bank’s exposure to various risks and to provide a consistent and understandable disclosure framework as per regulatory requirement. The Bank complies The aims of credit risk management, underpinning sustainably profitable business, are 3 Surplus capital BDT 18,503,646,703 19,838,533,937 principally 4 Capital adequacy ratio % 26.72 30.36 with the disclosure requirements set out by the Bangladesh Bank and International 5 Total assets BDT 167,781,627,571 140,808,972,270 Financial Reporting Standards (IFRS) and International Accounting Standards (IAS) as - to maintain a strong culture of responsible lending, supported by a robust risk 6 Total deposits BDT 117,820,526,848 97,829,653,473 approved by the Institute of Chartered Accountants of Bangladesh (ICAB). policy and control framework; 7 Total loans and advances BDT 83,245,637,855 68,241,274,411 - to both partner and challenge business originators eectively in defining and 8 Total contingent liabilities BDT 215,377,966,814 178,977,906,999 The major highlights of the Bangladesh Bank regulations are: 9 Advances/deposits ratio % 70.65 69.76  To maintain Capital Adequacy Ratio (CAR) at a minimum of 11.875% (including implementing risk appetite, and its re-evaluation under actual and scenario 10 Classified advances as a percentage of total advances % 1.77 2.31 capital conservation buer @1.875%) of Risk Weighted Assets (RWA); conditions; and 11 Profit after tax and provisions BDT 3,076,049,478 3,339,964,780  To adopt the standardised approach for credit risk for implementing Basel III, - to ensure independent, expert scrutiny and approval of credit risks, their costs and 12 Amount of classified loans BDT 1,475,858,628 1,573,244,596 using national discretion for: their mitigation. 13 Amount of provision against classified loans BDT 720,084,005 674,300,505 14 Provision surplus BDT - - - adopting the credit rating agencies as External Credit Assessment Institutions The standardised approach is applied for risk weighting of exposure as per directive of 15 Interest expenses BDT 2,242,405,469 1,479,579,958 (ECAI) for claims on sovereigns and banks; Bangladesh Bank. It requires banks to use risk assessments prepared by External Credit 16 Interest bearing assets BDT 140,341,350,834 125,467,894,924 - adopting simple/comprehensive approach for Credit Risk Mitigation (CRM). Assessment Institutions (ECAIs) to determine the risk weightings applied to rated 17 Non interest bearing assets BDT 27,440,276,737 15,341,077,346 counterparties. The Bank has applied some customer ratings based on their entity rating 18 Return on Investment (ROI)* % 3.99 4.73 - all unrated corporate exposures are risk weighted by assigning a risk weighting 19 Return on Average Investment (ROAI)* % 4.04 4.21 of 125%. as assigned by the approved ECAIs of Bangladesh Bank. 20 Return on Assets (ROA)* % 1.83 2.37  To adopt the standardised approach for market risk and basic indicator approach It is HSBC’s policy to establish that loans are within the customer’s capacity to repay, 21 Return on Equity (ROE)* % 10.02 11.41 for operational risk. 22 Income from investment BDT 1,136,268,380 1,487,194,008 rather than to rely excessively on security. Depending on the customer’s standing and  Capital adequacy returns must be submitted to Bangladesh Bank on a quarterly the type of product, facilities may be unsecured. Nevertheless, collateral can be an basis. important mitigant of credit risk. Financial Highlights (Oshore) as at 31 December 2018 2 Scope of application The Bank has guidelines on the acceptability of specific classes of collateral or credit risk mitigation, and determines suitable valuation parameters. Such parameters are Sl Particulars Currency**/ 2018 2017 The Bank has no subsidiaries or significant investments and Basel III is applied at Bank level only. expected to be conservative, reviewed regularly and supported by empirical evidence. No percentage Security structures and legal covenants are required to be subject to regular review to 1 Total assets BDT 141,507,957,799 113,421,262,693 3 Capital structure ensure that they continue to fulfill their intended purpose and remain in line with local 2 Total deposits BDT 2,636,471,643 2,569,560,805 market practice. The principal collateral types are as follows: 3 Total loans and advances BDT 139,822,834,972 112,693,593,785 Qualitative disclosures: - Cash collateral 4 Total contingent liabilities BDT 10,006,189,217 9,544,004,267 HSBC Bangladesh's capital structure consists of Tier I and Tier II capital which is align - In the personal sector, mortgages over residential properties 5 Classified advances as a percentage of total advances % - - with regulatory capital structure. Tier I capital further categorised as Common Equity 6 Profit after tax and provisions BDT 1,375,250,327 1,317,278,324 Tier 1 (CET1) and Additional Tier 1 capital. The computation of the amount of Common - In the commercial and industrial sector, charges over business assets such as 7 Interest expenses BDT 2,689,146,770 1,174,318,648 Equity Tier I, Additional Tier I and Tier II capital shall be subject to the following premises, stock and debtors, plan and machineries 8 Interest bearing assets BDT 141,498,742,307 113,409,735,799 conditions: 9 Non interest bearing assets BDT 9,215,492 11,526,894 Special attention is given to problem loans and appropriate action is initiated to protect 10 Return on Assets (ROA)* % 0.97 1.16 - The Bank has to maintain at least 4.5% of total Risk Weighted Assets (RWA) as the Bank's position on a timely basis and to ensure that loan impairment methodologies Common Equity Tier I capital. * Calculated on the basis of year end investments and assets balances respectively. result in losses being recognised when they are incurred. The objective of credit risk - Tier I capital will be at least 6% of the total RWA. ** Functional Currency of OBU is USD. Key Highlights are presented in equivalent BDT. management is to minimise the probable losses and maintaining credit risk exposure - Minimum Capital to Risk-weighted Asset Ratio (CRAR) will be 10% of the total RWA. within acceptable parameters. FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 Bangladesh Branches

HSBC has historically sought to maintain a conservative, yet constructive and Maturity breakdown of credit exposures Quantitative disclosures: 2018 2017 competitive credit risk culture. This has served the Group well, through successive BDT BDT economic cycles and remains valid today. This culture is determined and underpinned by 2018 Within Within Within Within Over Total the disciplined credit risk control environment which the Group has put in place to 1 month 1 to 3 months 3 to 12 months 1 to 5 years 5 years BDT Capital charge for operational risk 1,577,528,169 1,782,662,087 Claims on sovereigns govern and manage credit risk, and which is embodied in the formal policies and 10 Liquidity Ratio procedures adopted by HSBC Bangladesh. These are articulated through Group credit and central banks 39,749,639,332 - - - 6,003,076,828 45,752,716,160 policies supplemented by regional and local area lending guidelines, backed up by the Claims on banks 4,804,460,292 - - - - 4,804,460,292 Qualitative disclosures: Investments 1,507,862,515 550,716,344 5,856,625,018 - - 7,915,203,878 Bangladesh Bank’s "Managing Core Risks in Banking - Credit Risk Management - Liquidity Risk is the risk that the bank does not have sucient financial resources to meet Industry Best Practices" and "Guidelines on Credit Risk Management (CRM) for Banks". Claims on corporate 16,029,119,774 20,940,138,384 28,650,689,387 10,080,685,202 609,210,984 76,309,843,731 Claims on consumer 21,104,351 72,896,255 200,222,569 3,525,838,468 1,778,219,024 5,598,280,667 its obligations as they fall due or will have to do so at excessive cost. The risk arises from Formal policies and procedures cover all areas of credit lending and monitoring mismatch in the timing of cash flows. processes including: Fixed assets 152,684 3,273,548 24,320,688 211,964,043 53,132,303 292,843,266 All other assets 1,964,747,220 2,281,180,066 350,465,066 834,862,841 466,099,473 5,897,354,666 The objective of liquidity framework is to allow the Bank to withstand very severe stresses. - The Group Credit Risk Policy Framework Total on-balance sheet items 64,077,086,168 23,848,204,598 35,082,322,729 14,653,350,554 8,909,738,612 146,570,702,660 It is designed to be adaptable to change the business modes, markets and regulators. The - Risk appetite and evaluation of facilities O-balance sheet items 8,222,753,182 14,642,968,163 31,408,887,543 13,599,629,828 - 67,874,238,716 liquidity risk management frameworks requires: - Key lending constraints and higher-risk sectors Total 72,299,839,350 38,491,172,761 66,491,210,272 28,252,980,382 8,909,738,612 214,444,941,376 - liquidity to managed by Bank on stand-alone basis with no reliance on the - Risk rating systems Bangladesh Bank; - Facility structures 2017 Within Within Within Within Over Total - to comply with all regulatory limits; 1 month 1 to 3 months 3 to 12 months 1 to 5 years 5 years BDT - to maintain positive stressed cash flow; - Lending to banks, non-banks and sovereigns Claims on sovereigns - Personal lending and central banks 25,004,761,483 - - - 2,971,869,123 27,976,630,606 - monitoring the contingent funding commitments; - Corporate and commercial lending Claims on banks 3,803,560,788 - - - - 3,803,560,788 - monitoring the structural term mismatch between maturing assets and liabilities; - Portfolio management and stress testing Investments 1,534,562,621 2,107,491,428 4,815,712,892 2,097,249,949 - 10,555,016,890 - maintenance of robust and practical liquidity contingency plan; Claims on corporate 17,685,931,431 13,789,812,234 21,873,470,008 6,452,284,001 312,058,644 60,113,556,318 - maintain diverse sources of funding and adequate back up lines - Monitoring, control and the management of problem exposures Claims on consumer 570,300,114 80,034,270 163,288,215 4,182,076,422 1,862,614,256 6,858,313,277 - Impairments and allowances Fixed assets 8,074,045 496,977 12,863,909 210,399,406 102,009,151 333,843,488 Liquidity management of the Bank is centered on the Liquidity Coverage Ratio (LCR) and All other assets 7,372,653,151 1,389,019,096 426,544,968 612,285,558 5,321,866 9,805,824,639 Net Stable Funding Ratio (NSFR) based on BASEL III. The Bank has Asset Liability At the heart of these processes is a robust framework of accountability. HSBC operates Total on-balance sheet items 55,979,843,633 17,366,854,005 27,291,879,992 13,554,295,336 5,253,873,040 119,446,746,006 Management (ALM) desk to manage this risk with active monitoring and management a system of personal credit authorities, not credit committee structures. However, the O-balance sheet items 7,289,163,330 13,149,973,793 14,221,578,090 11,737,140,781 - 46,397,855,994 from Global Markets Department. Bank has set up a Risk Management Meeting (RMM) comprising all the members of the Total 63,269,006,963 30,516,827,798 41,513,458,082 25,291,436,117 5,253,873,040 165,844,602,000 Asset Liability Committee (ALCO) and other risk related function heads to manage The Bank has adopted Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) various risks within the Bank including credit risk. Relationship Managers are held for liquidity risk management. LCR ensures that banks maintain enough high quality Gross Non Performing Assets (NPAs) 2018 2017 accountable for both the profitability and growth of their loan portfolios as well as the unencumbered liquid assets to meet its liquidity needs for 30 calendar time-line whereas BDT BDT losses that may arise within them. NSFR ensures availability of stable funding is greater than required funding over 1 year Non Performing Assets (NPAs) to period. The Bank also has established a separate Risk Department which looks after the loan outstanding loans and advances 1,475,858,628 1,573,244,596 review mechanism and also helps in ensuring credit compliance with the post-sanction Bank has Asset Liability Management Committee (ALCO) to monitor the liquidity risk on a processes/ procedures laid down by the Bank from time to time. This involves taking up Movement of NPAs monthly basis. Based on the detail recommendation from ALM desk, ALCO take independent account-specific reviews of individual credit exposures as per the approved Opening Balance 1,573,244,596 1,546,816,754 appropriate action to manage the liquidity risk. To have more conservative approach lending guideline. The Risk department also monitors various credit concentration limits. Written o during the period (229,811,807) (184,493,595) towards liquidity risk measurement, the Bank has set internal LCR and NSFR limits which The Bank has in place a risk grading system for analysing the risk associated with credit. Recoveries during the period (81,515,249) (94,150,050) are more stringent and set higher than the regulatory limit of 100%. These ratios are The parameters for risk grading customers include financial condition and performance, Addition during the period 213,941,087 305,071,487 regularly monitored at ALCO. Also Bank has internal risk control framework which outlines quality of disclosures and management, facility structure, collateral and country risk Closing Balance 1,475,858,628 1,573,244,596 clear and consistent policies and principles for liquidity risk management. assessment where necessary. Maximum funded counterparty/group exposures are Quantitative disclosures: 2018 2017 limited to 15% of the Bank’s capital base as stipulated by Bangladesh Bank. Where a Movement of specific provision for NPAs BDT BDT higher limit is required for projects of national importance, prior approval of Bangladesh Opening Balance 674,300,505 678,083,447 Bank is obtained. Written o (net o recovery) during the period (60,155,650) (60,551,886) Liquidity coverage ratio (%) 119.92% 111.13% Recoveries during the period (61,797,309) (160,030,590) Net Stable Funding Ratio (%) 109.15% 111.96% Past dues and impaired exposures are defined in accordance with the relevant Stock of High quality liquid assets 63,630,750,251 48,878,111,009 Bangladesh Bank regulations. Specific and general provisions are computed periodically Provision made during the period 167,736,459 216,799,534 Closing Balance 720,084,005 674,300,505 Total net cash outflows over the next 30 calendar days 53,062,849,333 43,981,628,964 in accordance with Bangladesh Bank regulations. Available amount of stable funding 133,411,158,384 110,932,037,593 Required amount of stable funding 122,228,170,674 99,081,583,983 Credit risk mitigation 6 Equities: Disclosures for banking book positions The Bank has adopted the simple approach for credit risk mitigation under the The bank does not hold trading position in equities. 11 Leverage Ratio standardised approach where only cash collaterals are considered against the exposures to calculate the net exposure with applicable haircut. 7 Interest rate risk in the banking books Qualitative disclosures: Discussed in the next section under Market risk. Leverage ratio is the ratio of tier 1 capital to total on- and o-balance sheet exposures. The Specific provision leverage ratio was introduced into the Basel III framework as a non-risk based backstop 8 Market risk The Bank follows Bangladesh Bank guidelines regarding loan classifications, limit, to supplement risk-based capital requirements. provisioning and any other issues related to Non Performing Loan (NPL). The Bank’s Qualitative disclosures: In order to avoid building-up excessive on- and o-balance sheet leverage in the banking internal credit guidelines also give direction on the management of NPLs, the procedure Market risk is the risk to the Bank’s earnings and capital due to changes in the market level system, a simple, transparent, non-risk based leverage ratio has been introduced by the for reviewing loan provisioning, debt write o, facility grading, reporting requirements of interest rates or prices of securities, foreign exchange and equities, as well as the Bangladesh Bank. The leverage ratio is calibrated to act as a credible supplementary and interest recognition. However, the Bank’s guidelines will not supersede local volatilities of those changes. measure to the risk based capital requirements. The leverage ratio is intended to achieve regulations. Thus, while dealing with NPLs, the Bank's decision is always compliant with The Bank uses the standardised (market risk) approach to calculate market risk for trading the following objectives: local rules and regulations as well as Group guidelines which are more conservative than - constrain the build-up of leverage in the banking sector which can damage the local regulations. book exposures. The trading book consists of positions in financial instruments held with trading intent or in order to hedge other elements of the trading book. A capital charge will broader financial system and the economy; and Throughout the year the Bank reviews loans and advances to assess whether objective be applicable for financial instruments which are free from any restrictive covenants on - reinforce the risk based requirements with an easy to understand and a non-risk evidence has arisen of impairment of a loan or portfolio that warrants a change in the tradability, or able to be hedged completely. Generally, investments in ‘Held for Trading’ based measure. classification of loans and advances which may result in a change in the provision portfolios are focal parts of the trading book. The Bank has calculated the regulatory leverage ratio as per the guideline of Basel III. The required in accordance with BRPD circular no.14 (23 September 2012) as amended by Capital charge means an amount of regulatory capital which the Bank is required to hold BRPD circular no. 19 (27 December 2012). The guidance in the circulars follows a numerator, capital measure is calculated using the new definition of Tier I capital for an exposure to a relevant risk which, if multiplied by 10, becomes the risk-weighted applicable from 01 January 2015. The denominator, exposure measure, is calculated on formulaic approach whereby specified rates are applied to the various categories of amount of that exposure for that risk. loans as defined in the circulars. The provisioning rates are as follows: the basis of the Basel III leverage ratio framework as adopted by the Bangladesh Bank. The The Bank has a comprehensive treasury risk policy which inter alia covers assessment, exposure measure generally follows the accounting value, adjusted as follows: Specific provision on loans and advances monitoring and management of all the above market risks. The Bank has defined various - on-balance sheet, non derivative exposures are included in the exposure measure Specific provision on substandard loans and advances/investments internal limits to monitor market risk and is computing the capital requirement as per the net of specific provision; other than agricultural loans 20% standardised approach of Basel III. - physical or financial collateral is not considered to reduce on-balance sheet exposure; Specific provision on doubtful loans and advances/investment Details of various market risks faced by the Bank are set out below: - loans are not netted with deposits; other than agricultural loans 50% Interest rate exposures - o-balance sheet items are converted into credit exposure equivalents through Specific provision on substandard and doubtful agricultural loans 5% The Bank adopts the maturity method in measuring interest rate risk in respect of the use of credit conversion factors (CCFs). Depending on the risk category of the Specific provision on bad / loss and advances/investments 100% securities in the trading book. The capital charge for the entire market risk exposure is exposure a CCF of 20%, 50% or 100% is applied. Commitments that are computed under the standardised approach using the maturity method and in accordance unconditionally cancellable at any time by the bank without prior notice, a CCF of BRPD circular no.14 (23 September 2012) as amended by BRPD circular no. 19 (27 with guidelines issued by Bangladesh Bank. 10% is applied; December 2012) also provides scope for further provisioning based on qualitative judgments. In these circumstances, impairment losses are calculated on individual loans Interest rate exposures in the banking book - item deducted from Tier I capital such as deferred tax assets. considered individually significant based on which specific provisions are raised. If the Interest rate risk is the risk where changes in market interest rates might adversely aect Quantitative disclosures: 2018 2017 specific provisions assessed under the qualitative methodology are higher than the a bank’s financial condition. The immediate impact of changes in interest rates is on the BDT BDT specific provisions assessed under the formulaic approach above, the higher of the two Net Interest Income (NII). A long term impact of changing interest rates is on the Bank’s is recognised in liabilities under “Provisions for loans and advances” with any movement net worth since the economic value of a Bank’s assets, liabilities and o-balance sheet Leverage ratio 12.05% 14.51% in the provision charged/released in the profit and loss account. positions are aected by a variation in market interest rates. The responsibility of interest On balance sheet exposure 166,933,210,109 140,134,671,763 rate risk management rests with the Bank’s Asset and Liability Management Committee O balance sheet exposure 85,994,228,492 59,916,994,610 Quantitative disclosures: (ALCO). The Bank periodically computes the interest rate risk on the banking book that 2018 2017 arises due to re-pricing mismatches in interest rate sensitive assets and liabilities. For the Total exposure 252,927,438,601 200,051,666,373 Gross Credit Risk Exposure BDT BDT purpose of monitoring such interest rate risk, the Bank has in place a system that tracks the re-pricing mismatches in interest bearing assets and liabilities. For computation of the 12 Remuneration Claims on sovereigns and central banks 45,752,716,160 27,976,630,606 interest rate mismatches the guidelines of Bangladesh Bank are followed. Qualitative disclosures: Claims on banks 4,804,460,292 3,803,560,788 Investments 7,915,203,878 10,555,016,889 Foreign exchange risk The Bank has a Group specified remuneration policy which is designed to reward Claims on corporate 76,309,843,731 60,113,556,318 Foreign exchange risk is defined as the risk that a bank may suer losses as a result of competitively the achievement of long-term sustainable performance and attract and Claims on consumer 5,598,280,667 6,858,313,277 adverse exchange rate movements during a period in which it has an open position, either motivate the very best people who are committed to maintaining a long-term career with Fixed assets 292,843,266 333,843,488 spot or forward, or a combination of the two, in an individual foreign currency. The HSBC and performing their role in the long-term interests of shareholders. The Group All other assets 5,897,354,667 9,805,824,640 responsibility of management of foreign exchange risk rests with the Global Markets Remuneration Committee oversees the remuneration policy and are responsible for setting Total on-balance sheet items 146,570,702,660 119,446,746,006 department of the Bank. The Bank has set up internal limits to monitor foreign exchange the overarching principles, parameters and governance framework of the remuneration O-balance sheet items (after considering the credit conversion factor) 67,874,238,716 46,397,855,994 open positions. Foreign exchange risk is computed on the sum of net short positions or net policy. All members of the Committee are independent non-executive Directors of HSBC Total 214,444,941,376 165,844,602,000 long positions, whichever is higher of the foreign currency positions held by the Bank. Holdings plc. The Committee periodically reviews the adequacy and eectiveness of the Group’s remuneration policy and ensures that the policy meets the commercial Geographical distribution of credit exposures Equity position risk requirement to remain competitive, is aordable, allows flexibility in response to prevailing Total The Bank does not hold a trading position in equities. circumstances and is consistent with eective risk management. 2018 Dhaka Chattogram BDT Quantitative disclosures: HSBC's reward strategy aims to reward success and be properly aligned with Bank's risk Claims on sovereigns and central banks 44,872,775,722 879,940,437 45,752,716,160 The capital charge for various components of market risk is presented below: framework and related outcomes. In order to ensure alignment between remuneration and Claims on banks 4,804,460,292 - 4,804,460,292 the Bank's business strategy, individual remuneration is determined through assessment of Investments 7,913,400,978 1,802,900 7,915,203,878 The capital requirement for: 2018 2017 performance delivered against both annual and long term objectives summarised in Claims on corporate 65,969,684,816 10,340,158,915 76,309,843,731 BDT BDT performance scorecards as well as adherence to the HSBC Values of being 'open, Claims on consumer 4,724,947,636 873,333,032 5,598,280,667 connected and dependable' and acting with 'courageous integrity'. Altogether performance Fixed assets 225,104,928 67,738,337 292,843,266 Interest rate risk 35,230,937 104,554,312 is judged, not only on what is achieved over the short and long term, but also on how it is All other assets 5,861,966,568 35,388,099 5,897,354,667 Equity position risk - - achieved, as the later contributes to the sustainability of the organisation. Total on-balance sheet items 134,372,340,940 12,198,361,721 146,570,702,660 Foreign exchange risk 180,151,531 42,965,176 O-balance sheet items 63,364,761,148 4,509,477,568 67,874,238,716 Commodity risk - - HSBC’s reward package consists of the following key elements: Total 197,737,102,088 16,707,839,289 214,444,941,376 215,382,468 147,519,488 Fixed Pay: Total 9 Operational risk The purpose of the fixed pay is to attract and retain employees by paying market 2017 Dhaka Chattogram BDT competitive pay for the role, skills and experience required for the business. This includes Qualitative disclosures: salary, fixed pay allowance, and other cash allowances in accordance with local market Claims on sovereigns and central banks 26,980,987,114 995,643,492 27,976,630,606 Operational risk is the risk of loss arising from inadequate or failed internal processes, practices. These payments are fixed and do not vary with performance. Claims on banks 3,803,560,788 - 3,803,560,788 people and systems or external events, including legal risk. It is inherent in every business Investments 10,553,460,989 1,555,900 10,555,016,889 Benefits: organisation and covers a wide spectrum of issues. The Group manages this risk through Claims on corporate 50,689,868,210 9,423,688,108 60,113,556,318 HSBC provides benefits in accordance with local and international market practice. This a control based environment in which processes are documented, authorisation is Claims on consumer 5,590,355,721 1,267,957,557 6,858,313,278 includes but is not limited to the provision of pensions, medical insurance, life insurance independent and transactions are reconciled and monitored. This is supported by an Fixed assets 251,706,030 82,137,458 333,843,488 and relocation allowances etc. All other assets 9,754,082,891 51,741,748 9,805,824,639 independent programme of periodic reviews undertaken by internal audit and control Total on-balance sheet items 107,624,021,743 11,822,724,263 119,446,746,006 testing and by monitoring external operational risk events, which ensure that the Group Annual Incentive: O-balance sheet items 42,852,547,270 3,545,308,724 46,397,855,994 stays in line with industry best practice and takes account of lessons learned from HSBC provides annual incentive to drive and reward performance based on annual Total 150,476,569,013 15,368,032,987 165,844,602,000 publicised operational failures within the financial services industry. financial and non-financial measures consistent with the medium to long-term strategy, shareholder interests and adherence to HSBC values. Awards can be in the form of cash The Group has codified its operational risk management process by issuing a high level Industry distribution of exposures and shares. A portion of the annual incentive award is deferred and vests over a period of standard, supplemented by more detailed formal guidance. This explains how the Group Total 3 years. The Bank pays the incentive in the form of cash. manages operational risk by identifying, assessing, monitoring, controlling and mitigating 2018 Banks and FIs Manufacturing Industry Retail Others BDT Under the remuneration framework remuneration decisions are made based on a Claims on sovereigns the risk, rectifying operational risk events, and implementing any additional procedures combination of business results, performance against objectives set out in performance and central banks 45,752,716,160 - - - - 45,752,716,160 required for compliance with local regulatory requirements. The standard covers the Claims on banks 4,804,460,292 - - - - 4,804,460,292 following: scorecards, general individual performance of the role and adherence to the HSBC values, business principles, Group risk-related policies and procedures and Global Standards. Investments - - - - 7,915,203,878 7,915,203,878 - Operational risk management responsibility is assigned to senior management Claims on corporate - 37,578,118,257 25,641,660,899 - 13,090,064,576 76,309,843,731 within the business operation; Key features of HSBC’s remuneration framework include: Claims on consumer - - - 4,449,619,007 1,148,661,660 5,598,280,667 - Information systems are used to record the identification and assessment of - assessment of performance with reference to clear and relevant objectives set Fixed assets - - - - 292,843,266 292,843,266 operational risks and to generate appropriate, regular management reporting; within a performance scorecard framework; All other assets - - - - 5,897,354,667 5,897,354,667 Total on-balance sheet items 50,557,176,451 37,578,118,257 25,641,660,899 4,449,619,007 28,344,128,046 146,570,702,660 - Assessments are undertaken of the operational risks facing each business and the - a focus on total compensation (fixed plus variable pay) with variable pay (namely O-balance sheet items 22,295,126,694 - - - 45,579,112,022 67,874,238,716 risks inherent in its processes, activities and products. Risk assessment annual incentive and the value of long term incentives) dierentiated by Total 72,852,303,145 37,578,118,257 25,641,660,899 4,449,619,007 73,923,240,068 214,444,941,376 incorporates a regular review of identified risks to monitor significant changes; performance and adherence to HSBC values; - Operational risk loss data is collected and reported to senior management. - the use of discretion to assess the extent to which performance has been Total achieved; and 2017 Banks and FIs Manufacturing Industry Retail Others BDT Aggregate operational risk losses are recorded and details of incidents above a Claims on sovereigns materiality threshold are reported to the Group’s Audit Committee; and - deferral of a significant proportion of variable pay into HSBC shares to tie and central banks 27,976,630,606 - - - - 27,976,630,606 - Risk mitigation, including insurance, is considered where this is cost-eective. recipients to the future performance of the Group and align the relationship Claims on banks 3,803,560,788 - - - - 3,803,560,788 between risk and reward. The Group maintains and tests contingency facilities to support operations in the event Investments - - - - 10,555,016,889 10,555,016,889 Within this framework, risk alignment of our remuneration structure is achieved through of disasters. Additional reviews and tests are conducted in the event that any HSBC Claims on corporate - 31,327,362,706 21,058,323,994 - 7,727,869,618 60,113,556,318 the following measures: Claims on consumer - - - 6,395,725,753 462,587,524 6,858,313,277 oce is aected by a business disruption event, to incorporate lessons learned in the - Risk and compliance is a critical part of the assessment process in determining Fixed assets - - - - 333,843,488 333,843,488 operational recovery from those circumstances. Plans have been prepared for the the performance of all employees, especially senior executives and identified sta All other assets - - - - 9,805,824,640 9,805,824,640 continued operation of the Group’s business, with reduced stang levels. and material risk takers. All employees are required to have risk measures in their Total on-balance sheet items 31,780,191,394 31,327,362,706 21,058,323,994 6,395,725,753 28,885,142,159 119,446,746,006 In line with the instructions from the Bangladesh Bank, the Bank uses the basic indicator performance scorecards, which ensure that their individual remuneration has O-balance sheet items 15,008,078,441 - - - 31,389,777,553 46,397,855,994 been appropriately assessed with regard to risk. Total 46,788,269,835 31,327,362,706 21,058,323,994 6,395,725,753 60,274,919,712 165,844,602,000 approach to calculate its operational risk. FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 Bangladesh Branches & Oshore Banking Unit

- Adherence to HSBC values is a pre-requisite for any employee to be considered for products having international connectivity to meet the need of both corporate and variable pay. HSBC values are key to the running of a sound, sustainable bank. Balance Sheetas commercial customers. Services provided include working capital, term loans, payment Employees have a separate HSBC values rating which directly influences their overall at 31 December 2018 services and international trade facilitation, among other services, as well as expertise in performance rating considered by the Committee for their variable pay determinations. mergers and acquisitions, and access to financial markets. This allows the Bank to provide - For our most senior employees, the greater part of their reward is deferred and thereby 2018 2017 continuous support to companies as they grow both domestically and internationally and subject to malus, which allows the awards to be reduced or cancelled if warranted. Notes USD BDT USD BDT ensures a clear focus on internationally aspirant customers. The Bank has an OBU licence and therefore also provides foreign currency financing to qualifying customers. - The Group also carries out regular reviews to assess instances of non-compliance with PROPERTY AND ASSETS risk procedures and expected behaviour. Instances of non-compliance are escalated for Cash - Global Markets: Global Markets provides financial solutions mainly in foreign exchange and In hand (including foreign currencies) - - - - money market products to international and local corporations, institutional customers consideration in variable pay decisions, including adjustments and malus of unvested With Bangladesh Bank awards granted in prior years. For identified sta and Material Risk Takers (MRTs), the including other banks, the Central Bank as well as other market participants. Global (including foreign currencies) - - - - Markets operates a long-term relationship approach to provide solutions relating to the Committee has oversight of such decisions. - - - - clients foreign exchange needs. - All variable pay awards made to identified sta and material risk takers for the Balance with other banks performance year in which they have been identified as MRTs are also subject to the and financial institutions 5 - Financial Institutions Group (FIG): Financial Institutions Group is the client sector within Group Claw back Policy in accordance with the requirements in the Prudential In Bangladesh - - - - Global Banking and Markets responsible for all aspects of the Group's relationships with Regulation Authority’s Remuneration Code. Outside Bangladesh 10,083,446 841,435,335 8,660,260 716,142,014 financial institutions. Financial Institution Group manages banks and non-bank financial 10,083,446 841,435,335 8,660,260 716,142,014 institutions. Quantitative disclosures: 2018 2017 Money at call on short notice - - - - - Global Trade and Receivables Finance: HSBC is the largest trade bank with 150 years of BDT BDT experience. With a modern trade operation and robust technological platform, HSBC tries Number of meetings held by the main body overseeing Investments - - - - to ensure consistent and faster services to the customers in meeting their working capital remuneration during the financial year n/a n/a Loans and advances 6 requirements. Using a wide global-coverage and extensive experience in trade, the Global Remuneration paid to the main body overseeing remuneration i) Loans, cash credits, overdrafts, etc.: Trade and Receivable Finance (GTRF) continues to capture market share. The bank is during the financial year n/a n/a In Bangladesh 387,136,566 32,305,462,450 347,301,780 28,719,391,363 perfectly placed to introduce new trades products in modernised and digitised methods. Number of employees having received a variable remuneration Outside Bangladesh - - - - Currently, HSBC Bangladesh operates in both the major commercial hubs (i.e. Dhaka and 387,136,566 32,305,462,450 347,301,780 28,719,391,363 award during the financial year 763 770 Chattogram) in Bangladesh and has presence in all eight Export Processing Zones (EPZs) Guaranteed bonuses awarded during the financial year: ii) Bills purchased and discounted of the country through Business Development Oces (in Dhaka, Chattogram, Cumilla, Number of employee 860 847 (excluding treasury bills of the Government): Mongla, Adamjee, Karnaphuli, Ishwardi and Nilphamari). Total amount of guaranteed bonuses 80,668,542 76,045,093 Payable in Bangladesh 1,288,447,935 107,517,372,522 1,015,494,709 83,974,202,422 - Global Liquidity and Cash Management: Global Liquidity and Cash Management (GLCM) Payable outside Bangladesh - - - - Sign-on awards made during the financial year: 1,288,447,935 107,517,372,522 1,015,494,709 83,974,202,422 helps clients to optimise control over cash flows with our global payables, receivables and Number of employee - - 1,675,584,501 139,822,834,972 1,362,796,489 112,693,593,785 liquidity solutions coupled with online platform. Strategic cash management and Total amount of sign-on awards - - enhanced visibility are vital to success and business growth by making faster, smarter Fixed assets - - - - business decisions. GLCM is part of HSBC’s Global Commercial Banking and Global Severance payments made during the financial year: Banking and Markets and it supports relationship managers by providing the products and Number of employee 7 1 Other assets 7 10,110,435 843,687,493 139,394 11,526,894 Total amount of severance payments 35,867,138 8,827,049 expertise that our customers need. HSBC GLCM is uniquely positioned to help clients make Non - Banking assets - - - - payments across borders, across currencies with conformity to local regulations, quickly Total amount of outstanding deferred remuneration (in cash) 6,640,832 11,039,004 Total assets 1,695,778,382 141,507,957,800 1,371,596,143 113,421,262,693 and cost eectively with dedicated in country and regional support. Total amount of deferred remuneration paid out in the financial year 5,913,855 4,781,294 LIABILITIES AND CAPITAL 3 Basis of Preparation Breakdown of amount of remuneration Borrowing from other banks, 3.1 Statement of compliance awards for the financial year: financial institutions and agents 8 Fixed and variable 2,081,067,335 2,190,273,206 Bangladesh Bank - - - - The Financial Reporting Act 2015 (FRA) was enacted in 2015. Under the FRA, the Financial Reporting Council (FRC) is formed and it is yet to issue financial reporting standards for public Variable pay Other: interest entities such as banks. The Bank Company Act 1991 has been amended to require banks Deferred 7,414,662 7,007,823 In Bangladesh - - - - Outside Bangladesh 1,581,303,179 131,955,322,639 1,228,526,124 101,590,387,919 to prepare their financial statements under such financial reporting standards. The FRC has been Non-deferred 373,521,837 375,162,565 1,581,303,179 131,955,322,639 1,228,526,124 101,590,387,919 formed but yet to issue any financial reporting standards as per the provisions of the FRA and 380,936,499 382,170,388 1,581,303,179 131,955,322,639 1,228,526,124 101,590,387,919 hence International Financial Reporting Standards (IFRS) as approved by the Institute of Chartered Accountants of Bangladesh (ICAB) are still applicable. Deposits and other accounts 9 Current account and other accounts 22,844,633 1,906,320,659 23,681,634 1,958,302,992 Accordingly, the financial statements of the Bank continue to be prepared in accordance with Bills payable 8,351,077 696,873,993 7,000,358 578,879,904 International Financial Reporting Standards (IFRS) and the requirements of the Bank Company Act Oshore Banking Unit Term deposits 398,779 33,276,991 391,544 32,377,909 1991, the rules and regulations issued by Bangladesh Bank (BB), the Companies Act 1994. In case 31,594,489 2,636,471,643 31,073,536 2,569,560,805 any requirement of the Bank Company Act 1991, and provisions and circulars issued by Bangladesh Bank dier with those of IFRS, the requirements of the Bank Company Act 1991, and Independent Auditor's Report to the Management of Other liabilities 10 35,818,134 2,988,922,992 81,414,388 6,732,391,818 provisions and circulars issued by Bangladesh Bank shall prevail. Material deviations from the requirements of IFRS are as follows: The Hongkong and Shanghai Banking Corporation Limited, Total liabilities 1,648,715,802 137,580,717,274 1,341,014,048 110,892,340,542 Bangladesh Oshore Banking Unit i) Provision on loans and advances Capital/shareholders' equity 11 IFRS: As per IFRS 9 an entity shall recognise an impairment allowance on loans and advances Profit and loss account 47,062,580 3,927,240,526 30,582,095 2,528,922,151 based on expected credit losses. At each reporting date, an entity shall measure the impairment 47,062,580 3,927,240,526 30,582,095 2,528,922,151 Report on the Audit of the Financial Statements allowance for loans and advances at an amount equal to the lifetime expected credit losses if the Opinion Total liabilities and shareholders' equity 1,695,778,382 141,507,957,800 1,371,596,143 113,421,262,693 credit risk on these loans and advances has increased significantly since initial recognition whether assessed on an individual or collective basis considering all reasonable information, We have audited the financial statements of The Hongkong and Shanghai Banking O balance sheet items including that which is forward-looking. For those loans and advances for which the credit risk has Corporation Limited (HSBC), Bangladesh Oshore Banking Unit (the “Bank”) which comprise Contingent liabilities: 12 not increased significantly since initial recognition, at each reporting date, an entity shall measure the balance sheet as at 31 December 2018 and profit and loss account, cash flow statement Acceptances and endorsements 45,292,371 3,779,521,541 46,713,507 3,862,875,389 the impairment allowance at an amount equal to 12 month expected credit losses. and statement of changes in equity for the year then ended, and a summary of significant Letters of guarantee 4,162,021 347,308,999 1,319,397 109,104,764 Bangladesh Bank: As per BRPD circular No.15 (27 September 2017), BRPD circular No.16 (18 accounting policies, other explanatory notes and annexures thereto. Irrevocable letters of credit 70,456,033 5,879,358,677 67,382,135 5,572,024,114 Total O Balance Sheet items 119,910,425 10,006,189,217 115,415,039 9,544,004,267 November 2014), BRPD circular No.14 (23 September 2012), BRPD circular No. 19 (27 December In our opinion, the accompanying financial statements of the Bank give a true and fair view of 2012), BRPD circular No. 05 (29 May 2013) and BRPD circular No.1 (20 February 2018) a general the financial position of the Bank as at 31 December 2018, and of its financial performance The annexed notes 1 to 20 form an integral part of these financial statements. provision at 0.25% to 5% under dierent categories of unclassified loans (good/standard loans) and its cash flows for the year then ended in accordance with International Financial Reporting has to be maintained regardless of objective evidence of impairment. Also provision for Standards (IFRSs) as explained in note 3. sub-standard loans, doubtful loans and bad/loss loans has to be provided at 5%, 20%, 50% and 100% respectively for loans and advances depending on time past due. Again as per BRPD Basis for Opinion circular no. 10 dated 18 September 2007 and BRPD circular no. 14 dated 23 September 2012 , a We conducted our audit in accordance with International Standards on Auditing (ISAs). Our Francois de Maricourt Farhanul Gani Choudhury general provision at 1% is required to be provided for all o-balance sheet exposures. Such responsibilities under those standards are further described in the Auditors’ Responsibilities provision policies are not specifically in line with those prescribed by IFRS 9. for the Audit of the Financial Statements section of our report. We are independent of the Chief Executive Ocer, Bangladesh Chief Financial Ocer, Bangladesh ii) Other comprehensive income Bank in accordance with the International Ethics Standards Board for Accountants’ Code of As per our report of same date Ethics for Professional Accountants (IESBA Code) and requirements of Bangladesh Bank, and IFRS: As per IAS 1 Other Comprehensive Income (OCI) is a component of financial statements or we have fulfilled our other ethical responsibilities in accordance with the IESBA Code and the the elements of OCI are to be included in a single other comprehensive income statement. Institute of Chartered Accountants of Bangladesh (ICAB) Bye-laws. We believe that the audit Bangladesh Bank: Bangladesh Bank has issued templates for financial statements which will evidence we have obtained is sucient and appropriate to provide a basis for our opinion. strictly be followed by all banks. The templates of financial statements issued by Bangladesh Bank Hoda Vasi Chowdhury & Co Responsibilities of Management and Those Charged with Governance for the do not include Other Comprehensive Income nor are the elements of Other Comprehensive Dhaka, 18 February 2019 Chartered Accountants Financial Statements and Internal Controls Income allowed to be included in a single other Comprehensive Income (OCI) Statement. As such Management is responsible for the preparation and fair presentation of the financial the Bank does not prepare the other comprehensive income statement. However, elements of statements of the Bank in accordance with IFRSs as explained in note 3, and for such internal Profit and Loss Account OCI, if any, are shown in the statement of changes in equity. control as management determines is necessary to enable the preparation of financial for the year ended 31 December 2018 iii) Financial instruments – presentation and disclosure statements that are free from material misstatement, whether due to fraud or error. The Bank In several cases Bangladesh Bank guidelines categorise, recognise, measure and present financial Company Act, 1991 and the Bangladesh Bank Regulations require the Management to ensure 2018 2017 instruments dierently from those prescribed in IFRS 9. As such full disclosure and presentation eective internal audit, internal control and risk management functions of the Bank. The Notes USD BDT USD BDT requirements of IFRS 7 and IAS 32 cannot be made in the financial statements. Management is also required to make a self-assessment on the eectiveness of anti-fraud Interest income 13 72,080,059 6,014,879,099 50,211,933 4,152,170,354 internal controls and report to Bangladesh Bank on instances of fraud and forgeries. iv) Financial guarantees Interest paid on deposits and borrowings 14 (32,225,728) (2,689,146,770) (14,200,961) (1,174,318,648) IFRS: As per IFRS 9, financial guarantees are contracts that require the issuer to make specified In preparing the financial statements, management is responsible for assessing the Bank’s Net interest income 39,854,331 3,325,732,329 36,010,972 2,977,851,706 ability to continue as a going concern, disclosing, as applicable, matters related to going payments to reimburse the holder for a loss it incurs because a specified debtors fails to make concern and using the going concern basis of accounting unless management either intends Commission, exchange and brokerage 15 5,530,133 461,474,114 5,698,165 471,197,816 payment when due in accordance with the original or modified terms of a debt instrument. to liquidate the Bank or to cease operations, or has no realistic alternative but to do so. Those Total operating income 45,384,464 3,787,206,443 41,709,137 3,449,049,522 Financial guarantee liabilities are recognised initially at their fair value plus transaction costs that charged with governance are responsible for overseeing the Bank’s financial reporting Operating expenses 16 (17,916,990) (1,495,122,648) (14,005,232) (1,158,133,221) are directly attributable to the issue of the financial liabilities. The financial guarantee liability is subsequently measured at the higher of the amount of loss allowance for expected credit losses process. Profit before provision 27,467,474 2,292,083,795 27,703,905 2,290,916,301 as per impairment requirement and the amount initially recognised less, income recognised in Auditor’s Responsibilities for the Audit of the Financial Statements Specific provision - - - - accordance with the principles of IFRS 15. Financial guarantees are included within other Our objectives are to obtain reasonable assurance about whether the financial statements as Profit before tax 27,467,474 2,292,083,795 27,703,905 2,290,916,301 liabilities. a whole are free from material misstatement, whether due to fraud or error, and to issue an Provision for tax Bangladesh Bank: As per BRPD 14, financial guarantees such as letter of credit and letter of auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, Current year (10,986,989) (916,833,468) (11,774,142) (973,637,977) guarantee will be treated as o-balance sheet items. No liability is recognised for the guarantee but is not a guarantee that an audit conducted in accordance with ISAs will always detect a except the cash margin. material misstatement when it exists. Misstatements can arise from fraud or error and are Prior year - - - - considered material if, individually or in the aggregate, they could reasonably be expected to (10,986,989) (916,833,468) (11,774,142) (973,637,977) v) Cash flow statement influence the economic decisions of users taken on the basis of these financial statements. Net Profit after tax 16,480,485 1,375,250,327 15,929,763 1,317,278,324 IFRS: The cash flow statement can be prepared using either the direct method or the indirect As part of an audit in accordance with ISAs, we exercise professional judgement and maintain The annexed notes 1 to 20 form an integral part of these financial statements. method. The presentation is selected to present these cash flows in a manner that is most professional skepticism throughout the audit. We also: appropriate for the business or industry. The method selected is applied consistently. • Identify and assess the risks of material misstatement of the financial statements, Bangladesh Bank: As per BRPD 14, the cash flow statement is a mixture of both the direct and whether due to fraud or error, design and perform audit procedures responsive to those the indirect methods. risks, and obtain audit evidence that is sucient and appropriate to provide a basis for vi) O-balance sheet items our opinion. The risk of not detecting a material misstatement resulting from fraud is Francois de Maricourt Farhanul Gani Choudhury IFRS: As per IFRS, there is no requirement for disclosure of o-balance sheet items on the face of higher than for one resulting from error, as fraud may involve collusion, forgery, Chief Executive Ocer, Bangladesh Chief Financial Ocer, Bangladesh the balance sheet. intentional omissions, misrepresentations, or the override of internal control. Bangladesh Bank: As per BRPD circular no. 14 dated 25 June 2003, o balance sheet items (e.g. • Evaluate the appropriateness of accounting policies used and the reasonableness As per our report of same date Letter of credit, Letter of guarantee etc.) must be disclosed separately on the face of the balance of accounting estimates and related disclosures made by management. sheet. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances. vii) Loans and advances net of provision Hoda Vasi Chowdhury & Co • Conclude on the appropriateness of management’s use of the going concern basis of IFRS: Loans and advances should be presented net of provisions. Chartered Accountants accounting and, based on the audit evidence obtained, whether a material uncertainty Dhaka, 18 February 2019 Bangladesh Bank: As per BRPD 14, provision on loans and advances are presented separately as exists related to events or conditions that may cast significant doubt on the Bank’s liability and cannot be netted o against loans and advances. ability to continue as a going concern. If we conclude that a material uncertainty exists, Cash Flow Statement we are required to draw attention in our auditor’s report to the related disclosures in the for the year ended 31 December 2018 3.2 Basis of measurement financial statements or, if such disclosures are inadequate, to modify our opinion. Our The financial statements have been prepared on the historical cost basis. conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Bank to cease to continue 2018 2017 3.3 Functional and presentation currency as a going concern. A Cash flow from operating activities: Notes USD USD Items included in the financial statements of the OBU are measured using the currency of the • Evaluate the overall presentation, structure and content of the financial statements, Interest received 72,077,939 50,228,160 primary economic environment in which the entity operates (‘the functional currency’). The including the disclosures, and whether the financial statements represent the Interest paid (28,503,360) (13,157,828) financial statements of the OBU are presented in USD which is the OBU’s functional and underlying transactions and events in a manner that achieves fair presentation. Commission, exchange and brokerage received 5,592,354 5,727,012 presentation currency. The balance sheet and profit and loss accounts are also presented in BDT using the exchange rate prevailing at the balance sheet date. Report on Other Legal and Regulatory Requirements Operating profit before changes in operating In accordance with the Companies Act, 1994, the Bank Company Act, 1991 and the rules and assets and liabilities 49,166,933 42,797,344 3.4 Use of estimates and judgements regulations issued by Bangladesh Bank, we also report that: (Increase)/decrease in operating assets: The preparation of financial statements requires management to make judgments, estimates and (i) we have obtained all the information and explanations which to the best of our Loans and advances to customers (312,788,012) (313,266,824) assumptions that aect the application of accounting policies and the reported amounts of assets, knowledge and belief were necessary for the purpose of our audit and made due Other assets (10,000,000) - liabilities, income and expenses. Actual results may dier from these estimates. verification thereof; Increase/(decrease) in operating liabilities: Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the periods in which the estimate is revised and in any future periods (ii) to the extent noted during the course of our audit work performed on the basis stated Customers' deposits and other accounts 520,953 (7,658,735) aected. under the Auditor’s Responsibility section in forming the above opinion on the financial Borrowing from other banks and financial institutions 352,777,055 287,371,147 statements and considering the reports of the Management to Bangladesh Bank on Other liabilities (78,253,743) (30,193,434) In particular, information about significant areas of estimation uncertainty and critical judgements anti-fraud internal controls and instances of fraud and forgeries as stated under the (47,743,747) (63,747,846) in applying accounting policies that have the most significant eect on the amounts recognised in Management’s Responsibility for the financial statements and internal control: the financial statements is described below: a) internal audit, internal control and risk management arrangements of the Bank as Net cash receipt/(used) from operating activities 1,423,186 (20,950,502) Provisions on loans and advances - as explained in note 4.3. disclosed in the financial statements appeared to be materially adequate; B) Cash flow from investing activities: - - b) nothing has come to our attention regarding material instances of forgery or 3.5 Reporting period irregularity or administrative error and exception or anything detrimental committed C) Cash flow from financing activities: These financial statements cover one calendar year from 1 January 2018 to 31 December 2018. by employees of the Bank; These financial statements are authorised for issue by management of the Bank on 18 February Profit remitted to head oce 11 - - (iii) in our opinion, proper books of account as required by law have been kept by the Bank 2019. so far as it appeared from our examination of those books; D) Net increase/(Decrease) in cash and cash equivalents (A+B+C) 1,423,186 (20,950,502) 3.6 Cash flow statement (iv) the records and statements submitted by the branches have been properly maintained The cash flow statement has been prepared in accordance with the IAS 7 Cash Flow Statements and consolidated in the financial statements; E) Opening cash and cash equivalents 8,660,260 29,610,762 considering the requirements specified in the BRPD Circular No. 14 dated 25 June 2003 issued by (v) the balance sheet and profit and loss account together with the annexed notes dealt the Banking Regulation and Policy Department of Bangladesh Bank. with by the report are in agreement with the books of account and returns; F) Closing cash and cash equivalents (D+E) 17 10,083,446 8,660,260 (vi) the expenditures incurred were for the purpose of the Bank’s business for the year; 3.7 Statement of Liquidity (vii) the financial statements have been drawn up in conformity with prevailing rules, Notes to the Financial Statemens as at and The liquidity statement of assets and liabilities as on the reporting date has been prepared on regulations and accounting standards as well as related guidance issued by for the year ended 31 December 2018 residual maturity term as provided in the statement. Bangladesh Bank; 4 Significant accounting policies (viii) adequate provisions have been made for loans and advances and other assets which 1 Background are in our opinion, doubtful of recovery; 4.1 Foreign currencies The Hongkong and Shanghai Banking Corporation Limited ("HSBC"), Bangladesh Branches ("the (ix) the information and explanations required by us have been received and found According to IAS 21 "The Eects of Changes in Foreign Exchange Rates" transactions in foreign Bank") commenced the operation of its Oshore Banking Unit (OBU) on 9 July 1998 after currencies are recorded in the functional currency at the rate of exchange prevailing on satisfactory; and obtaining its licence from Bangladesh Bank. HSBC is incorporated in Hong Kong and its ultimate (x) we have reviewed over 80% of the risk weighted assets of the Bank and spent over 220 holding company HSBC Holdings plc ("the Group") is incorporated in England. the date of the transaction. Monetary assets and liabilities denominated in foreign currencies person hours. are translated into the functional currency at the rate of exchange ruling at the balance sheet 2 Principal activities date. Any resulting exchange dierences are included in the profit and loss account. HSBC oers a comprehensive range of financial services in Bangladesh including commercial and 4.2 Loans and advances institutional banking, retail banking, global markets, global trade and receivable finance, global liquidity and cash management and custody and clearing. Loans and advances to customers are stated in the balance sheet on a gross basis, as per the Hoda Vasi Chowdhury & Co requirement of Bangladesh Bank. Dhaka, 18 February 2019 Chartered Accountants - Commercial Banking: Commercial Banking provides a wide range of financial services and FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 Oshore Banking Unit

4.3 Provision on loans and advances 5 Balance with other Banks and Financial Institutions 12 Contingent liabilities 2018 2017 At each balance sheet date and periodically throughout the year, the Bank reviews loans and advances 2018 2017 USD USD to assess whether objective evidence that impairment of a loan or portfolio of loans has arisen USD USD Acceptance and endorsement 45,292,371 46,713,507 supporting a change in the classification of loans and advances, which may result in a change in the Inside Bangladesh - - 45,292,371 46,713,507 provision required in accordance with BRPD circular No.1 (20 February 2018), BRPD circular No.15 (27 Outside Bangladesh: Letter of guarantees: September 2017), BRPD circular No.16 (18 November 2014), BRPD circular No.14 (23 September HSBC Bank, USA - USD - 3,166,955 Money for which the bank is contingently liable 2012), BRPD circular No. 19 (27 December 2012) and BRPD circular No. 05 (29 May 2013). The HSBC Bank, UK - GBP 991,476 787,311 in respect of guarantees given favoring: guidance in the circular follows a formulaic approach whereby specified rates are applied to the various HSBC Bank, UK - EUR 3,993,502 4,072,536 Government 2,049,795 1,305,397 categories of loans as defined in the circular. The provisioning rates are as follows: HSBC Hong Kong - CNY 2,736 4,100 Other 2,112,226 14,000 2018 2017 Credit Suisse AG - CHF 1,775,674 296,194 4,162,021 1,319,397 Specific provision on loans and advances BDT BDT HSBC France 2,892,910 - HSBC Bank, Japan - JPY 427,148 333,164 Irrevocable letters of credit 70,456,033 67,382,135 Specific provision on substandard loans and advances/investments (For detail see Annexure - B) 10,083,446 8,660,260 70,456,033 67,382,135 other than agricultural loans 20% 20% 119,910,425 115,415,039 5.1 Segregation of balances with other banks and 13 Interest income Specific provision on doubtful loans and advances/investments financial institutions based on types of account other than agricultural loans 50% 50% Overdraft 278,080 232,147 Current account 10,083,446 8,660,260 Term loans 12,809,627 12,139,785 Specific provision on substandard and doubtful agricultural Short term deposit account - - Import loans 6,823,810 4,656,179 loans and advances/investments 5% 5% 10,083,446 8,660,260 Working capital 103,807 358,459 Specific provision on bad/loss and advances/investments 100% 100% 5.2 Maturity grouping of balance with other banks and Export and import bills 52,031,451 32,701,967 BRPD circular No.14 (23 September 2012) as amended by BRPD circular No. 19 (27 December 2012) financial institutions Income from inter-group lending 29,157 123,278 also provides scope for further provisioning based on qualitative judgments. In these circumstances Payable on demand 10,083,446 8,660,260 Income from lending to HSBC Bangladesh Branches 4,127 118 impairment losses are calculated on individual loans considered individually significant based on which Payable within one month - - 72,080,059 50,211,933 specific provisions are raised. If the specific provisions assessed under the qualitative methodology are More than one month but less than three months - - 14 Interest paid on deposits and borrowings More than three months but less than one year - - higher than the specific provisions assessed under the formulaic approach, the higher of the two is Borrowing from banks 32,151,007 13,327,391 More that one year but less than five years - - recognised in liabilities under “Provision for loans and advances” with any movement in the provision Customer fixed deposits 1,501 1,271 Over five years - - charged/released in the profit and loss account. Classified loans are categorised into sub-standard, Interest on borrowing from HSBC Bangladesh Branches 73,220 872,299 10,083,446 8,660,260 doubtful and bad/loss based on the criteria stipulated by Bangladesh Bank guideline. 32,225,728 14,200,961 6 Loans and advances 4.4 Loan write-o 15 Commission, exchange and brokerage Loans Exchange income/loss 281,063 (26,423) Loans are normally written o, when there is no realistic prospect of recovery of these amounts and in Inside Bangladesh Commission income: accordance with BRPD circular No.13 (07 November 2013) and BRPD circular No.2 (13 January 2003). Overdraft 8,586,020 6,565,428 Import LC 3,016,272 2,962,670 A separate Debt Collection Unit (DCU) has been set up which monitors loans written o and legal Term loans 236,748,418 219,048,661 Export LC 2,086,000 2,547,495 action taken through the money loan court. These write-os do not undermine or aect the amount Import loans 135,791,944 113,566,019 Credit facilities 142,269 83,500 claimed against the borrower by the Bank. Working Capital 6,010,184 8,121,672 Remittance 23,950 147,210 387,136,566 347,301,780 The DCU maintains a separate record for all individual cases written o by each branch. The DCU 5,268,491 5,740,875 Outside Bangladesh - - follow-up on the recovery eorts of these written o loans and reports to management on a periodic Commission paid (19,421) (16,287) 387,136,566 347,301,780 basis. Written o loans and advances are reported to the Credit Information Bureau (CIB) of Bangladesh 5,249,070 5,724,588 Bank. Bills purchased and discounted: 5,530,133 5,698,165 Inside Bangladesh 4.5 Provisions on balances with other banks and financial institutions (Nostro accounts) Import bills - - 16 Operating expenses Provisions for unsettled transactions on nostro accounts made are reviewed on a semi-annual basis by Export bills 1,288,447,935 1,015,494,709 Head oce expense (Note 4.14) 9,095,759 - management and certified by the Bank's external auditors in accordance with Bangladesh Bank Foreign 1,288,447,935 1,015,494,709 Expense allocation from HSBC Bangladesh Branches 8,821,231 14,005,232 Exchange Policy Department (FEPD) circular No. 677 (13 September 2005). Outside Bangladesh - - 17,916,990 14,005,232 1,288,447,935 1,015,494,709 17 Cash and cash equivalents 4.6 Provisions for other assets 1,675,584,501 1,362,796,489 Balance with other banks (Note 5) 10,083,446 8,660,260 BRPD circular No.14 (25 June 2001) requires a provision of 100% on relevant other assets which are 6.1 Maturity grouping of loans and advances Money at call on short notice - - outstanding for one year and above. The Bank maintains provision in line with this circular unless no including bills discounted and purchased 10,083,446 8,660,260 provision is required based on objective assessment. Payable on demand 16,249,152 8,391,281 18 Related party transaction Payable within one month 275,776,796 220,345,324 4.7 Deposits by customers and banks More than one month but less than three months 488,856,033 383,455,184 The related parties of the Bank include HSBC Holdings plc, other group entities, post-employment Deposits by customers and banks are recognised when the Bank enters into the contractual provisions More than three months but less than one year 669,307,020 554,969,064 benefit plans for HSBC employees, Key Management Personnel, close family members of Key of the arrangements with counterparties, which is generally on trade date, and initially measured at the More that one year but less than five years 86,348,880 94,794,314 Management Personnel and entities which are controlled or jointly controlled by Key Management consideration received. Over five years 139,046,620 100,841,322 Personnel or their close family members. 1,675,584,501 1,362,796,489 The OBU, not being incorporated in Bangladesh, operates in Bangladesh under the banking licence 4.8 Borrowings from other banks, financial institutions and agents 6.2 Maturity analysis of bills purchased and discounted issued by Bangladesh Bank and therefore the Key Management Personnel of the Bank for the purposes Borrowings from other banks, financial institutions and agents includes interest-bearing borrowings of IAS 24 are defined as those persons having authority and responsibility for planning, directing and Within one month 253,240,236 192,434,749 controlling the OBU, being members of the Board of Directors of the Group, Group Managing Directors, against securities from Bangladesh Bank and call borrowing from other banks. These items are More than one month but less than three months 417,270,734 328,752,203 recognised in financial statements at the gross value of the outstanding balance. and close members of their families and companies they control, or significantly influence, or for which More than three months but less than six months 428,457,827 395,600,993 significant voting power is held. More than six months but less than one year 189,479,138 98,706,764 4.9 Other liabilities 1,288,447,935 1,015,494,709 18.1 Transactions with key management personnel Other liabilities comprise items such as provision for loans and advances, provision for taxation, interest 6.3 Classification of loan and advances There were no transactions between the OBU and the key management personnel of the OBU in 2018 payable, interest suspense, accrued expenses etc. Other liabilities are recognised in the balance sheet (2017: USD nil). according to the guidelines of Bangladesh Bank, Income Tax Ordinance 1984 and internal policy of the Unclassified: Bank. Standard 1,675,584,501 1,362,796,489 18.2 Transactions, arrangements and agreements involving group entities Special Mention Account - - 4.10 Osetting financial assets and financial liabilities 1,675,584,501 1,362,796,489 The OBU provides and receives certain banking and financial services to/from entities within the Group. As at year end the balances with these entities is disclosed in Note 5, Balance with other banks and Financial assets and financial liabilities are oset and the net amount reported in the balance sheet Classified: financial institutions and Note 8, Borrowings from other banks, financial institutions and agents. when there is a legally enforceable right to oset the recognised amounts and there is an intention to Substandard - - The disclosure of the year end balance is considered to be the most meaningful information to settle on a net basis, or realise the asset and settle the liability simultaneously. Doubtful - - Bad/Loss - - represent transactions during the year. The outstanding balances includes loans made to or deposits by 4.11 Contingent liabilities - - the OBU arising in the ordinary course of business and on substantially the same terms, including 1,675,584,501 1,362,796,489 interest rates and security, as for comparable transactions with third party counterparties. Interest As per IAS 37 contingent liability is: income received by the OBU from these entities during 2017 amounted to USD11,127 A possible obligation that arises from past events and the existence of which will be confirmed only by 6.4 Sector-wise classification of loans and advances (2017:USD68,215) and interest paid to these entities during 2018 amounted to USD932,494 (2017: the occurrence or non-occurrence of one or more uncertain future events not wholly within the control Readymade Garments and Textile 397,468,224 312,923,384 USD1,596,130) both of which is included in the net interest income disclosed in the profit and loss of the Bank; or Other Manufacturing companies 115,918,908 104,870,147 account. Other 1,162,197,369 945,002,958 A present obligation that arises from past events but is not recognised because: 1,675,584,501 1,362,796,489 18.3 Transactions with other related parties of the Bank - it is not probable that an outflow of resources embodying economic benefits will be required to 6.5 Particulars of loans and advances The OBU provides certain banking and financial services and administrative services to the Bank settle the obligation; or operating in Bangladesh under the banking licence issued by Bangladesh Bank. As at year end the i) Loans considered good in respect of which - income earned from services provided is recognised as revenue as the services are provided balance with the Bank is disclosed in Note 10, Other Liabilities. the Bank is fully secured; 1,675,584,501 1,362,796,489 Contingent liabilities are not recognised but disclosed in the financial statements unless the possibility ii) Loans considered good against which the Bank holds no Operating expenses incurred centrally by the Bank are apportioned between the onshore banking of an outflow of resources embodying economic benefits is reliably estimated. security other than the debtor's personal guarantee; - - business and oshore banking unit on the basis of total operating income. Income tax assessed for the iii) Loans considered good secured by the personal Bank and the OBU are paid by the Bank and the element relating to the OBU is recharged back to the Contingent assets are not recognised in the financial statements as this may result in the recognition of OBU as disclosed in Note 10, Other liabilities. income which may never be realised. undertakings of one or more parties in addition to the personal guarantee of the debtor; - - 19 Events after the balance sheet date 4.12 Cash and cash equivalents iv) Loans adversely classified; provision not maintained there against; - - There were no material events after the balance sheet date that may require adjustment or disclosure. For the purpose of the cash flow statement, cash and cash equivalents include highly liquid v) Loans due by directors or ocers of the banking company 20 General investments that are readily convertible to known amounts of cash and which are subject to an or any of these either separately or jointly with any other persons; - - insignificant risk of change in value and include cash on hand and balances with Bangladesh Bank, vi) Loans due from companies or firms in which the directors 20.1 Audit Committee other banks and financial institutions. of the Bank have interests as directors, partners or managing agents or in case of private companies as members; - - According to BRPD circular no.12 (23 December 2002), all banks are advised to constitute an audit 4.13 Revenue Recognition vii) Maximum total amount of advance including temporary committee comprising of members of the board. The audit committee will assist the board in fulfilling Interest income and expense advance made at any time during the year to directors or its oversight responsibilities including implementation of the objectives, strategies and overall business plans set by the board for eective functioning of the bank. The committee will review the financial Interest income and expenses are recognised in the profit and loss account on accrual basis. In case of managers or ocers of the Bank or any of them either separately or jointly with any other person; - - reporting process, the system of internal control and management of financial risks, the audit process, Amanah, mark-up on investments is taken into the income account proportionately from profit viii) Maximum total amount of advances, including temporary and the bank's process for monitoring compliance with laws and regulations and its own code of receivable accounts. Overdue/late payment charge on investment is transferred to charity suspense advances granted during the year to the companies or firms business conduct. account instead of income account. in which the directors of the Bank have interest as directors, The Bank, being a Branch of a foreign bank, does not have a local board of directors from whom to In accordance with BRPD circular No.14 (23 September 2012) as amended by BRPD circular No. 19 (27 partners or managing agents or in case of private companies select an audit committee locally; however, the Bank has received a dispensation from Bangladesh December 2012) interest accrued on sub-standard loans and doubtful loans are credited to an “Interest as members; - - Bank on 19 December 2006 with regards to this requirement. The Bank has an Audit Committee in UK, Suspense Account” which is included within “Other liabilities”. Interest from loans and advances ix) Due from other banking companies; - - comprising of at least three independent non-executive directors of the Group. The committee meets ceases to be accrued when they are classified as bad/loss. It is then kept in interest suspense in a x) Classified loans and advances: on a regular basis with the senior management of the Group, and with the internal and external auditors memorandum account. Interest received on sub-standard loans, doubtful loans and bad/loss loans are a) Classified loans and advances on which no interest to consider and review the nature and scope of the reviews as well as the eectiveness of the systems retained in the “Interest Suspense Account” until the loan is no longer considered to be impaired. is credited to income; - - of internal control and compliance and the financial statements of the Group. b) Provision on classified loans and advances; - - Interest expense on deposits The Group Head of Internal Audit reports to the Chairman of the Group Audit Committee and frequent c) Provision kept against loan classified as bad debts; - - meetings are held between them during the year. Administratively the Group Head of Internal Audit Interest expenses for all deposits are recognised in the profit and loss account on an accrual basis. d) Interest credited to the interest suspense account; - - reports to the Group Chief Executive. Executive management is responsible for ensuring that issues xi) Cumulative amount of written o loans: Commission and fee income raised by the Global Internal Audit function are addressed within an appropriate and agreed timetable. Opening balance - - Confirmation to this eect must be provided to Global Internal Audit. There are quarterly Townhalls The Bank earns commission and fee income from a diverse range of services provided to its customers. Amount written o during the year - - (Global Alignment Sessions) arranged regularly to align all the country internal audit teams across the Commission and fee income is accounted for as follows: The amount of written o loan for which law suit has been filed - - globe with the latest update from the HSBC Group Audit Committee. The Bank is subject to regular - income earned on the execution of a significant act is recognised as revenue when the act is 6.6 Geographical Segmentation of Loans and Advances periodic regulatory and risk based audits by the internal audit of HSBC in liaison with the auditors from completed the regional and global teams, where necessary. All internal audit reports are subject to quality Dhaka 1,673,646,413 1,360,541,604 assurance by the Global Quality Control team prior final issuance. - income earned from services provided is recognised as revenue Chattogram 1,938,088 2,254,885 Exchange income 1,675,584,501 1,362,796,489 20.1 Exchange Rates Exchange income includes all gains and losses from foreign currency transactions. 7 Other assets The assets and liabilities as at 31 December in foreign currencies have been converted to USD at the following rates: Interest receivable from banks and other financial institutions 34,881 1,241 2018 2017 4.14 Operating expenses Commission receivable 75,554 138,153 USD USD Operating expenses incurred centrally by the Bank are apportioned between the Bangladesh Branches HSBC Bangladesh Branches 10,000,000 - and Oshore banking unit on the basis of total operating income. Group head oce expenses (HoE) are 10,110,435 139,394 GBP 1 = 1.2631 1.3436 EUR 1 = 1.1395 1.1937 recognised in OBU to the extent as allowed through FE circular No.15 (10 June 2018). As per the said 8 Borrowings from other banks, financial institutions and agents CNY 1 = 0.1457 0.1530 circular, foreign banking companies operating in Bangladesh are allowed to remit head oce expense CHF 1 = 1.0088 1.0205 up to 10% of the profit before tax in accordance with the Income Tax Ordinance (ITO) 1984. As the total In Bangladesh - - amount of HoE is recognised in OBU, the remaining operating expenses is allocated to OBU as such Outside Bangladesh 20.3 Assets and liabilities have been converted into Taka currency @ USD 1 = BDT 83.4472 which that the basis of apportionment as stated above remain unchanged. HSBC, Hong Kong 1,580,502,093 1,228,526,124 represents the year-end middle rate of exchange as at 31 December 2018. Other deposits- nostro overdrawn 801,086 - 4.15 Income tax 1,581,303,179 1,228,526,124 20.4 Previous year's figures have been rearranged, where necessary, to conform with the current year's presentation. Income tax on the profit or loss for the year comprises current tax. Income tax is recognised in the profit 1,581,303,179 1,228,526,124 and loss account except to the extent that it relates to items recognised directly in shareholders’ equity, 8.1 Classification based on type of security 20.5 Figures appearing in these financial statements have been rounded o to the nearest integer. in which case it is recognised in shareholders’ equity. Secured - - Current tax is the tax expected to be payable on the taxable profit for the year, calculated using tax rates Unsecured 1,581,303,179 1,228,526,124 as prescribed in the Income Tax Ordinance (ITO) 1984 and relevant Special Regulatory Orders (SRO) and 1,581,303,179 1,228,526,124 any adjustment to tax payable in respect of previous years. Currently the income tax rate applicable for banks is 40%. 8.2 Maturity grouping of borrowings from other banks, Francois de Maricourt Farhanul Gani Choudhury financial institutions and agents Chief Executive Ocer, Bangladesh Chief Financial Ocer, Bangladesh 4.16 Amanah facilities through OBU Payable on demand 801,086 - Dhaka, 18 February 2019 Following a strategic review of all business and operations around the world, the Group decided to Payable within one month 52,249,593 68,390,724 More than one month but less than three months - - restructure its Islamic banking business and will no longer oer Shariah compliant products and Statement of Liquidity Annexure - A services in Bangladesh. Within the restructuring procedure, the existing books of the Amanah business More than three months but less than one year - - will run-o up to maturity as per Bangladesh Bank approval letter ref no. BRPD (P-3)745(37)/2013-1693 More than one year but less than five years 1,528,252,500 1,160,135,400 as at 31 December 2018 (Assets & Liabilities Maturity Analysis) 1,581,303,179 1,228,526,124 dated 10 April 2013. Maturity up to Maturity within Maturity within Maturity within Maturity over Total 9 Deposits and other accounts Particulars 1 month 1 to 3 months 3 to 12 months 1 to 5 years 5 years Amount 4.17 New accounting standards not yet adopted 2018 2017 USD USD USD USD USD USD The Bank has consistently applied the accounting policies as set out in Note 4 to all periods presented USD USD Assets in these financial statements. The various amendments to standards, including any consequential Cash in hand ------Current account 20,367,586 19,709,137 Balance with other banks and amendments to other standards, with the date of initial application of 1 January 2018 have been Sundry deposits 2,477,047 3,972,497 financial institutions 10,083,446 - - - - 10,083,446 considered. However, these amendments have no material impact on the financial statements of the Money at call on short notice ------Bills payable 8,351,077 7,000,358 Investment in Treasury Bills and others ------Bank. Term deposits 398,779 391,544 Loans and advances to customers (note 6.1) 292,025,948 488,856,033 669,307,020 86,348,880 139,046,620 1,675,584,501 Fixed assets ------In December 2017, ICAB vide letter 1/1/ICAB-2017 decided to adopt IFRS replacing BFRS eective for 31,594,489 31,073,536 Other assets 10,075,554 34,881 - - - 10,110,435 annual periods beginning on or after 1 January 2018. However, since issued BFRS have been adopted 9.1 Maturity analysis of deposits and other accounts Non-banking assets ------from IFRS without any major modification, such changes would not have any material impact on Total assets 312,184,948 488,890,914 669,307,020 86,348,880 139,046,620 1,695,778,382 financial statements. Payable on demand 29,271,503 28,795,263 Liabilities Payable within one month 14,885 74,210 Borrowings from other banks and A number of standards and amendments to standards are eective for annual periods beginning on or More than one month but less than three months 444,080 425,093 financial institutions (note 8.2) 53,050,679 - - 1,528,252,500 - 1,581,303,179 after 1 January 2019 and earlier application is permitted. However, the Bank has not early applied the Deposits and other accounts (note 9.1) 29,286,388 444,080 638,097 1,225,924 - 31,594,489 More than three months but less than one year 638,097 1,377,879 Other liabilities (including following new standards in preparing these financial statements. More than one year but less than five years 1,225,924 401,091 capital/shareholders equity) 28,903,980 6,914,154 47,062,580 - - 82,880,714 31,594,489 31,073,536 Total liabilities 111,241,047 7,358,234 47,700,677 1,529,478,424 - 1,695,778,382 (a) IFRS 16 Leases Net liquidity dierence 200,943,901 481,532,680 621,606,343 (1,443,129,544) 139,046,620 - IFRS 16, issued in January 2016 replaces existing leases guidance and eective for reporting period 10 Other liabilities beginning on or after 1 January 2019. It will result in almost all leases being recognised on the balance Interest payable 6,328,275 2,605,907 Balance with Other Banks and Annexure - B sheet, as the distinction between operating and finance leases is removed. Under the new standard, an Commission received in advance 119,501 88,359 Financial Institutions - Outside Bangladesh as at 31 December 2018 asset (the right to use the leased item) and a financial liability to pay rentals are recognised. The only Payable to Head Oce 9,095,759 - exceptions are short-term and low-value leases. The accounting for lessors will not significantly HSBC Bangladesh Branches 19,808,221 78,279,374 2018 2017 change. The Bank shall implement IFRS 16 subject to Bangladesh Bank approval. Others 466,378 440,748 Name of the banks Currency Foreign Foreign 35,818,134 81,414,388 name RCY Rate currency (USD) RCY Rate currency (USD) (b) IFRS 17 Insurance contract HSBC Bank USA USD - 1.0000 - 3,166,955 1.0000 3,166,955 IFRS 17 was issued in May 2017 and applies to annual reporting periods beginning on or after 1 11 Profit and loss account HSBC Bank UK GBP 784,954 1.2631 991,476 585,971 1.3436 787,311 HSBC Bank UK EUR 3,504,609 1.1395 3,993,502 3,411,692 1.1937 4,072,536 January 2021. IFRS 17 establishes the principles for the recognition, measurement, presentation and Opening balance 30,582,095 14,652,332 HSBC, Hong Kong CNY 18,787 0.1457 2,736 26,798 0.1530 4,100 disclosure of insurance contracts within the scope of the standard. The objective of IFRS 17 is to ensure Profit for the year 16,480,485 15,929,763 Credit Suissie AG SW CHF 1,760,226 1.0088 1,775,674 290,241 1.0205 296,194 that an entity provides relevant information that faithfully represents those contracts. The Bank has not Profit remitted to head oce - - HSBC France EUR 2,538,754 1.1395 2,892,910 - 0.0000 - yet assessed in potential impact of IFRS 17 on its financial statements. Closing balance 47,062,580 30,582,095 HSBC Japan JPY 47,362,121 0.0090 427,148 37,605,866 0.0089 333,164 Total 10,083,446 8,660,260